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Thursday, 23 June 2016

When filling up of blank Cheque will not amounts to Material Alteration in case of dishonour of cheque?

With regard to the instruments other than a cheque, an impliedauthority is given to the holder at the time of entrusting it to fill up thesame. There may be instances where an implied authority is given to theperson, at the time of entrusting a signed blank cheque containing thesignature of the drawer of the cheque, to fill the columns therein. If a principal or employer deputes his agent or employee topurchase an article and if the dealer fills up that signed blank chequeleaf showing the exact amount covered by the bill showing the price ofthe article sold then it cannot be said that what was handed over by thedrawer of the cheque is only a signed blank cheque leaf. In such cases animplied authority to the trader/seller of the article to fill up the chequeleaf can certainly be inferred. Similarly, there may also be cases where atthe time of settlement of the accounts, a particular amount was foundpayable by the drawer of the cheque to the other party and if a signedblank cheque entrusted to be filled up later is filled up in tune with theaccounts, showing the actual amount payable by the drawer of thecheque to the other party, then also it can be said that there was theimplied authority to fill up the signed blank cheque leaf. There may besuch instances where the sum is ascertainable and the signed blankcheque leaf is given to fill up the same after ascertaining the same. Insuch cases there would be no difficulty to infer an implied authoritygiven by the drawer. Simply because the cheque is seen filled up orwritten in the hand writing of another person it cannot lead to aconclusion that only a signed blank cheque leaf was given. The personsigning the cheque may have difficulty due to many reasons to write thecheque and it might have been filled up by the payee or by another. Insuch cases it cannot be said that what was handed over was only asigned blank cheque leaf. In all such cases the ultimate conclusion maydepend upon the proof of the transaction and execution of theinstrument. It must also be held that when it is a case that only a signedblank leaf was handed over by the accused, then he must offersatisfactory explanation as to the circumstances under which the signedblank cheque happened to be handed over. Considering the totality of

the evidence and circumstances, it is for the court to draw the inferenceas to whether it was given with an implied authority to fill up the sameshowing the amount ascertained or ascertainable to discharge the debtor liability. Therefore, there may be such cases where implied authoritycan be inferred. But the contention that when a signed blank cheque leafis handed over, it can never be filled up and that if it is filled up it wouldamount to a material alteration within the meaning of using Section 87of the N.I. Act, does not stand to rhyme or reason. Similarly, thecontention that Section 20 of the N.I. Act is applicable to an unfilled orblank cheque leaf also cannot be accepted. It would depend upon thefacts of each case. Therefore, it is neither a case which attracts Section87 of the N.I. Act nor is it a case where the complainant can rely uponSection 20 of the N.I. Act and contend that as a signed blank cheque leafis given it gives an authority to fill up the same according to the whimand fancy of the payee. [See : P. Purushothaman Nair v. K. SreekantanNair, 2013 (4) ILR (Ker) 115]IN THE HIGH COURT OF GUJARAT AT AHMEDABADCRIMINAL MISC.APPLICATION (FOR QUASHING & SET ASIDE FIR/ORDER)NO. 968 of 2014

1 Since the issues raised, in all the captioned applications, are moreor less the same, and the relief prayed for is also to quash the selfsamecriminal case, those were heard analogously are being disposed of bythis common judgment and order. 2 The facts of this case may be summarized as under:2.1 The complainant M/s. Sharda Steel Corporation is a partnershipfirm registered under the Partnership Act. The complainant firm isengaged in the business of supply of Steel, Cement, etc. Shri Bharat B.Shah is one of the partners of the firm. One Shri Chimanlal B. Shah is anauthorized person so far as the business of the partnership firm isconcerned. Both Shri Bharat B. Shah and Shri Chimanlal B. Shah arebrothers. 2.2 The Gujarat Pipavav Port Limited (original accused No.1) is acompany incorporated under the Companies Act. The accused Nos.2 to19 shown in the complaint are the Directors and other Office Bearers ofthe company. 2.3 Sometime in the decade of early 90’s, the company startedconstructing a Jetty at the Pipavav Port. An agreement was entered into

between the complainant firm and the accused company for supply ofSteel, Cement, etc for the purpose of the construction of the Port. 2.4 At the relevant point of time i.e. the applicant of the CriminalMiscellaneous Application No.968 of 2014, in his capacity, as theManaging Director and Vice President of the company issued a blanksigned cheque in favour of the complainant firm as a security. 2.5 In the course of the business transactions, a dispute arose betweenthe accused company and the complainant firm. The complainant firmpreferred three Special Civil Suits Nos.35 of 2000, 36 of 2000 and 37 of2000 in the Court of the Civil Judge, Senior Division, Amreli, forrecovery of a certain amount raised through bills. The Civil Suits are stillpending as on date. In the year 2008 with the consent of the parties, thelearned Civil Judge passed an order in the Special Civil Suit No.36 of2000 appointing M/s. Chhajed & Doshi Company, CharteredAccountants, having its Head Office at Mumbai, as a mediator for thepurpose of settling the accounts. 2.6 M/s. Chhajed & Doshi Company submitted its report dated 28thApril 2009, according to which, the accused company owes a sum ofRs.15,82,23,865/­ (Rupees Fifteen Crore Eighty Two Lac Twenty ThreeThousand Eight Hundred Fifty Five only) to the complainant firm. 2.7 The complainant firm, thereafter, started demanding the amountfrom the accused company. There was lot of correspondence betweenthe complainant and the accused company between 2010 and 2013 inthat regard. Ultimately, the complainant thought fit to fill up the blanksigned cheque, which was drawn by the then Managing Director onbehalf of the company as a security. The cheque was filled up on 28th

March 2013 for the amount of Rs.15,82,23,858/­ drawn in favour of theSharda Steel Corporation. The complainant negotiated the cheque inquestion through its banker Dena Bank which was dishonoured with anendorsement of “account closed”. 2.8 The complainant, thereafter, issued a statutory notice dated 23rdApril 2013, and called upon the company to make good the amountmentioned in the cheque. The drawer of the cheque, namely, Mr. NikhilP. Gandhi (original accused No.2) gave a reply dated 6th May 2013denying his liability. The complainant, thereafter, proceeded to file acomplaint in the Court of the learned Chief Judicial Magistrate atMahuva. The complaint came to be registered as the Criminal InquiryCase No.20 of 2013. After recording of the verification of thecomplainant, the Court thought fit to order a Magisterial inquiry underSection 202 of the Code of Criminal, 1973. On completion of theMagisterial inquiry, the Chief Judicial Magistrate, Mahuva thought fit toissue process against the company and the Directors named in thecomplaint for the offence under Section 138 of the NegotiableInstruments Act. On process being issued, the case came to be ultimatelyregistered as the Criminal Case No.1710 of 2013. 2.9 Hence, these applications by the company and the Directors forquashing of the criminal proceedings initiated for the offence punishableunder Section 138 of the Negotiable Instruments Act. 3 At the outset, I may state that the learned counsel appearing forthe complainant very fairly made a statement that the criminalproceedings may be quashed so far as the following applicants of theCriminal Miscellaneous Application No.1067 of 2014 and CriminalMiscellaneous Application No.1756 of 2014 are concerned. A pursis in

writing duly signed by the advocates on record was tendered before thisCourt. The details are as under:“Criminal Miscellaneous Application No.1067 of 20141. Christian Moller Laursen (petitioner No.1 and original accused No.5)2. Luis Miranda (petitioner No.3 and original accused No.8)”“Criminal Miscellaneous Application No.1756 of 20141. Mr. Sunil Chawla (petitioner No.1 and original accused No.11)2. Mr. Anup Sheth (petitioner No.2 and original accused No.10)3. Dinesh Kumar Lal (petitioner No.3 and original accused No.7).”4 The aforesaid concession at the end of the complainant was givenon the ground that at the time when the offence is alleged to have beencommitted, they were no way concerned with the day­to­day affairs andmanagement of the company. 5 However, so far as the company and the other accused areconcerned, it was argued that the proceedings may not be quashed. 6 I heard Mr. Nephde, the learned senior advocate, Mr. MahendraR. Anand, the learned senior advocate, and Mr. Mihir Thakore, thelearned senior advocate and Mr. S.I. Nanavati, the learned senioradvocate appearing for the company and the Directors. I also heard Mr.Abad Ponda, the learned senior advocate who appeared on behalf of thecomplainant. 7 It is not in dispute that a signed blank cheque leaf was given tothe complainant sometime in the year 1994­95. Except the signature ofthe then Managing Director Shri Gandhi, the other parts of the bodywere blank.

8 Let me take note of some of the admissions in the complaint itself.“4) For and on behalf of accused No.1 Company, the accused No.2 hadgiven cheque as security. In the year 2000 some cheques had arisenbetween the complainant firm and the accused No.2 and the accused No.1Company did not pay legitimate amount of the complainant firm,therefore, the complainant has filed SPL. Civil Suit No.35 of 2000,36/2000 and 37/2000 in the Civil Court at Amreli for recovery of dues,wherein the Court granted exparte interim injunction below Ex. 5 in SPL.Civil Suit No.36 of 2000.”“9) The accused were not releasing payment of legitimate dues ofcomplainant and were passing time. It is respectfully submitted that thecheque No.839170 of Dena Bank, Industrial Finance Branch, Mumbai wasgiven by accused as security to the complainant. The partner ofcomplainant firm wrote a detailed letter dated 9­2­2013 to the accusedand requested the accused to make payment of legitimate dues else thecomplainant intend to present aforesaid cheque to the banker of accusedfor its clearing for Rs.15,82,23,858/­ in favor of the complainant. Still,however, the accused did not make payment of dues to complainant,hence, the complainant filled up necessary details in the said cheque anddeposited aforesaid cheque in the bank on 28­3­2013 for realization of itsproceeds.”9 Let me also take note of the averments made in the statutorynotice issued by the complainant under Section 138 of the Act:“3. That in consideration and on account of the just and legallyenforceable debt i.e. towards the price for the sale, supply and delivery ofcement and iron and other materials to you No.1 by our clients, You No.1through You No.2 have issued to our clients cheques signed in blankincluding cheque No.839170 drawn on Dena Bank, Industrial FinanceBranch, Bombay­400 005. The said cheques were given by way of securitytowards payment of the price of the said goods sold and delivered by ourclients to You No.1 from the office of our clients from Mahuva. Thye saidcheques were signed by You No.2 as Director and on behalf of You No.1.”10 In the reply to the statutory notice issued by the complainant, thefollowing was informed by the drawer of the cheque, namely, Shri

Gandhi. “2.1 That the Management of Gujarat Pipavav Port Limited (hereinafterreferred to as “GPPL Company”, for short) has been changed with effectfrom 30.5.2005 and the said GPPL Company was taken over by A.P.Moller Group upon purchase of shares and execution of TransferAgreement and since then, GPPL Company is run and managed by saidA.P. Moller Group and our clients i.e. Mr. Nikhil P. Gandhi and Mr. SunilTandon have ceased to be the Director and the Managing Directorrespectively of the said GPPL Company. Please note that Mr. SuniltTandon has already resigned as Managing Director of GPPL Company asback as in October, 2001 and Mr. Nikhil P. Gandhi has already resignedas Director of GPPL Company with effect from 13.4.2005 and theirresignations were duly accepted and acted upon by GPPL Company. 2.2 You may also be pleased to note that a similar notice (as aforesaid)was issued by your client on 5.1.2010 to GPPL Company and GPPLCompany has elaborately replied on 8.4.2010 negating all the allegationsincluding the allegations of issuance of blank cheque in favour of yourclient. Therefore, your aforesaid notice dated 23.4.2013 is nothing butmalicious abuse of process of law actuated with the motive of threateningour clients for the payment of illegal claim of your client for which CivilSuits have been already filed by your client in the year 2000, which arepresently pending for adjudication before Civil Court at Amreli. In the saidCivil Suits (especially Special Civil Suit No.36 of 2000 pending in the CivilCourt at Amreli), the erstwhile Management of the GPPL Company hasalready filed its Written Statement wherein the company has specificallynegated all the claims of your client. On the contrary, the company hasfiled a Courter Claim against your client. Moreover, there is seriousdispute raised by the GPPL Company for the “accommodation bills” issuedby your client upon GPPL Company. The said “accommodation bills” are tothe extent of Rs.4.36 crores (approximately) for which your client has notmade any actual supply of material to GPPL Company and the dispute ispending for adjudication in the Civil Court at Amreli..2.3 Our clients have further instructed us to state that Mr. SunilTandon has ceased to be the Managing Director of GPPL Company witheffect from October 2001 and Mr. Nikhil P. Gandhi has ceased to be theDirector of GPPL Company with effect from 13.4.2005. It is pertinent tonote here that the date mentioned in the cheque No.839170 (which isdishonoured) is 25.3.2013. Under Section 118 of the NegotiableInstruments Act, 1881, there is a lawful presumption under Clause (b) ofSection 118 that “Every Negotiable Instrument bearing a date wasmade or drawn on such date.” Undisputedly, on 25.3.2013, Mr. NikhilP. Gandhi was not the Director of GPPL Company and he cannot sign thenegotiable instrument (cheque) as the Director of GPPL Company for the

simple reason that he has already resigned as Director of GPPL Companyand h is resignation was duly accepted and acted upon with effect from13.4.2005 by GPPL Company. It is under these circumstances, either thesignature of Mr. Nikhil Gandhi is forged by your client or the negotiableinstrument (cheque) is not negotiable under the provisions of theNegotiable Instruments Act, 1881 being time barred, has been misused byyour client by writing the date on which the instrument. Our clients havefurther instructed us to state that even the Account from which the saidcheque was alleged to have been issued was also closed long back by thenew Management of GPPL Company. Therefore, your client ought not tohave utilized the said cheque for the simple reason that the disputebetween the parties is still pending before the Civil Court, claims andcounter claims are yet to be adjudicated, liabilities of any of the partieshave still to be determined by the Civil Court and, therefore, there is notquestion of issuance of a cheque dated 25.3.2013 of the alleged amount byour client in favour of your client. Your client, with mala fide intentionand ulterior motive to abuse the process of law, has filled up the cheque inquestion and deposited the said cheque in his bank account knowing fullywell that the signatory to such cheque has no authority under the law tosign and/or issue such cheque in favour of your client. It is under thesecircumstances that the action of your client is nothing but malicious, abuseof process of law actuated with the motive of threatening the present andpast Directors and other officers of GPPL Company for unlawful claim ofyour client in the pending Civil Suits.”11 Thus, the picture that emerges from the materials on record andcertain admissions on the part of the complainant is as under:(a) For the purpose of construction of a Port by the accused company,materials like Steel, Cement, etc, were purchased from the complainant. (b) The agreement in this regard was entered into sometime in 90’si.e. 1994­95. It is evident from the cheque in question that the same is ofa cheque­book issued in the decade of 1990’s. (c) Indisputably, the cheque in question was a blank signed cheque. (d) The cheque came to be deposited after filling up other details bythe complainant on 25th March 2013 i.e. almost after a period of

seventeen years from the date of handing over of the blank cheque. TheSpecial Civil Suits are still pending for the adjudication. The amountwhich was filled up in the cheque was on the basis of the report of theM/s.Chhajed & Doshi, Chartered Accountants, having its Head Office atMumbai. Many objections have been raised by the accused company asregards the report of M/s.Chhajed & Doshi, Chartered Accountants. (e) The entire management of the accused company got changed witheffect from 30th May 2005 and was taken over by the A.P. Moller Groupupon purchase of the shares and execution of the Transfer Agreement.This fact has been admitted in para – 2 of the complaint itself. (f) No sooner the management of the entire company was taken overby the A.P. Moller Group, the bank account on which the cheque wasdrawn was closed and a new account was opened by the newmanagement. (g) The drawer of the cheque, namely, Mr. Nikhil P. Gandhi, ceased tobe the Managing Director of the company with effect from 13th April2005. The other details are as under:“(i) Blank Cheque given by Nikhil Gandhi : Prior to 2000(ii) Date of Retirement of Nikhil Gandhi: 13­4­2005(iii) Closure of Bank A/c: 17­7­2008(iv) Date of Cheque drawn by Nikhil Gandhi : 25­3­2013CRIMINAL MISCELLANEOUS APPLICATION NO.1754 OF 2014Petitioner No.: Gujarat Pipavav Port LtdPetitioner No.2: Prakash Tulsiani (Managing Director)Date of Appointment : 28­1­2009

12 Mr. S.I. Nanavati, the learned senior advocate appearing for thedrawer of the cheque vehemently submitted that the learned Magistratecommitted a serious error in taking cognizance upon the complaint andought not to have issued process for the offence punishable underSection 138 of the Negotiable Instruments Act. 13 Mr. Nanavati laid much stress on the fact that that what washanded over to the complainant was a signed blank cheque leaf by wayof security. According to him, the complainant could not have filled upthe cheque on its own after a period of almost seventeen years accordingto his whims and fancies. Mr. Nanavati submitted that the signed blankcheque could be termed as an incomplete document or inchoateinstrument. He submitted that the complainant had no implied authorityto fill up a signed blank cheque by way of security and present it forencashment. 14 Mr. Nanavati submitted that Section 20 of the NegotiableInstruments Act would not apply to a cheque, and therefore, the holderof the cheque had no authority to make or complete a negotiableinstrument. 15 Mr. Nanavati submitted that the complainant was fully aware ofthe fact that way back in the year 2005, the drawer of the cheque hadceased to be the Managing Director of the company with the change ofthe management. He further submitted that the complainant was alsoaware of the fact that the account on which the signed blank cheque wasdrawn got closed on 17th July 2008 upon the instructions to the bank bythe new management. 16 Mr. Nanavati submitted that since the cheque was issued by wayof security, it could not be said that there was any existing debt or

liability. 17 Mr. Nanavati placed reliance on Section 118(b) of the N.I. Actwhich provides that until the contrary is proved, it shall be presumedthat every negotiable instruments bearing a date was made or drawn onsuch date. 18 Mr. Nanavati submitted that the presumption which is available inthe law, by virtue of Section 139 of the N.I. Act, that the holder of thecheque received the cheque of the nature referred to in Section 138 forthe discharge, in whole or in part, or any debt or other liability, could besaid to have stood rebutted on the face of the admission made by thecomplainant in the complaint itself that the instrument was handed overby way of security. 19 Mr. Nanavati submitted that filling up of a signed blank, after aperiod of almost seventeen years, without the consent of the company orthe the drawer of the cheque and without any implied authority, wouldamount to material alteration, as explained in Section 87 of the N.I. Act. 20 Mr. Nanavati, in support his submissions, placed reliance on twodecisions of the Supreme Court (1) D.C.M. Financial Services Limited v.J.N. Sareen and another [2008 (8) SCC 1] and (2) Indus Airways PvtLtd v. Magnum Aviation Private Limited [2014 (2) 12 SCC 539].21 Mr. Nephde, the learned senior advocate appearing for some ofthe accused vehemently submitted that Section 20 of the NegotiableInstruments Act would not save the situation and in the year 2013, thecomplainant had no implied authority to fill up a blank signed cheque onits own according his whims and fancies.

22 Mr. Nephde submitted that none of the Directors or other OfficeBearers are liable to be prosecuted by virtue of Section 141 of the N.I.Act as there is nothing on record to indicate that on the date ofcommission of the alleged offence, they were in any manner connectedwith the day­to­day affairs and management of the company. 23 Mr. Nephde placed strong reliance on the following decisions:(1) M.S. Narayan Menon @ Mani v. State of Karnataka andanother [2006(6) SCC 39](2) Sudhir Kumar Bhalla v. Jagdish Chand and others [2008(7)SCC 137](3) Urban Cooperative Credit Society v. State of Gujaratthrough its Manager Jayrajbhai [2003 (2) GLH 629](4) B. Suresh Yadav v. Sharifa Bee and another [2007(13) SCC107](5) N.K. Wahi v. Shekhar Singh and others [2007(9) SCC 481](6) Amita Malhotra v. Apparel Export Promotion Council andanother [2012(1) SCC 520]24 Mr. Mihir Thakore, the learned senior advocate for some of theaccused also vehemently submitted that his clients are not liable to beprosecuted for the offence punishable under Section 138 of the N.I. Actby virtue of the vicarious liability created under Section 141 of the N.I.Act. Mr. Thakore placed reliance on the following two decisions of theSupreme Court:

(1) K.K. Ahuja v. V.K. Vora [2009(10) SCC 48](2) National Small Industries Corporation Limited v. HarmeetSingh Paintal and another [2010 (3) SCC 330]25 Mr. Mahendra Anand, the learned senior advocate appearing forsome of the accused also submitted that his clients are not liable to beprosecuted for the offence punishable under the N.I. Act by virtue ofSection 141 of the N.I. Act. 26 In such circumstances referred to above, all the learned senioradvocates appearing for the applicants submitted that the prosecutionshould fail and the complaint deserves to be quashed. 27 On the other hand, all the applications are vehemently opposed byMr. Abad Ponda, the learned senior advocate appearing for thecomplainant. 28 Mr. Ponda submitted that by virtue of Section 20 of the Act,although what was handed over to his client was a signed blank cheque,yet his client had the implied authority to fill up the signed blank chequeand present it for the purpose of encashment. He vehemently submittedthat a signed blank cheque would remain a bill of exchange till the dateis filled up in the said instrument. 29 Mr. Ponda submitted that the drawer of the cheque cannotabsolve himself from the liability only on the ground that he ceased to bethe Managing Director of the company in the year 2005. According toMr. Ponda, although he ceased to be the Managing Director much beforethe cheque was filled up and presented, yet being the drawer, his

liability would continue. 30 Mr. Ponda submitted that except the few Directors for whom hegave concession to quash the complaint, all other accused could be saidto be liable for the dishonour of the cheque by virtue of Section 141 ofthe N.I. Act. 31 Mr. Ponda submitted that there are highly disputed questions offact which will have to be considered by the trial Court on the basis ofthe evidence that would be led oral as well as documentary. Hesubmitted that having regard to the limited scope of interference inexercise of the inherent powers under Section 482 of the Cr.P.C., thisCourt may not quash the proceedings at this stage. 32 Mr. Ponda vehemently submitted that even if the cheque is issuedby way of security, it would still attract the provisions of Section 138 ofthe N.I. Act. He submitted that neither the Section 138 nor explanationto it suggests that the debt or other liability should be in existence on thedate of issuance of the cheque, i.e. on the date of its delivery to thedrawee. 33 Mr. Ponda laid much emphasis on the fact that the instrument inquestion assumed the character of a cheque for the first time on 25thMarch 2013, as till that date, the instrument remained a bill ofexchange. He submitted that when the instrument was handed over inthe form of a signed blank cheque, it was just a bill of exchange andassuming for the moment that at the time of handing over of such signedblank cheque, there was no existing debt or liability, still when thecheque was filled up, the liability had been crystallized, and therefore,the argument that the cheque was issued only for the purpose of securityshould fail.

(11) Sonu Gupta v. Deepak Gupta and others [2015 (3) SCC424]35 Having heard the learned counsel appearing for the parties andhaving considered the materials on record, the following questions fallfor my consideration:(i) Whether Section 20 of the Negotiable Instruments Actapplies to a cheque as well?(ii) Whether filling up of a signed blank cheque leaf wouldamount to a material alteration within the meaning of Section 87of the N.I. Act?(iii) Is there an implied authority to a person who receives asigned blank cheque leaf to fill up the same showing any amountas he likes? (iv) Whether the presumption under Section 139 of the Actcould be said to have stood rebutted by the admission in thecomplaint itself that the blank signed cheque was issued by way ofsecurity? (v) A person who had resigned as the Managing Director withthe knowledge of the complainant in 2005 could be said to be aperson in­charge of the company in 2013 when the cheque wasdishonoured? Whether it could be said that the drawer of thecheque, who ceased to be the Director eight years before thedishonour, had no say in the matter of seeing that the cheque ishonoured? Whether he could have asked the company to pay the

amount?(vi) Whether mere reproduction of the wordings of the Section141(1) of the N.I. Act in the complaint is sufficient to make aperson liable to face prosecution for the dishonour of the cheque? ● DISCUSSION:➢ THE ISSUE AS REGARDS SECTIONS 20 AND 87 OF THENEGOTIABLE INSTRUMENTS ACT:36 Section 20 of the N.I. Act reads as under:“20. Inchoate stamped instrumentsWhere one person signs and delivers to another a paper stamped inaccordance with the law relating to negotiable instruments then in force ina [India], and either wholly blank or having written thereon anincomplete negotiable instrument, he thereby gives prima facie authorityto the holder thereof to make or complete, as the case may be, upon it anegotiable instrument, for any amount specified therein and not exceedingthe amount covered by the stamp. The person so signing shall be liableupon such instrument, in the capacity in which he signed the same, to anyholder in sue course for such amount : provided that no person other thana holder in due course shall recover from the person delivering theinstrument anything in excess of the amount intended by him to be paidthereunder.”37 Section 20 deals with the inchoate stamped instruments, and thescheme of that section is that when a person signs and delivers toanother person an inchoate document which is properly stamped inaccordance with the law relating to negotiable instruments, then by doing so he gives a prima facie authority to the holder to complete thedocument, the authority being restricted to filling the amount notexceeding that which would be covered by the stamp upon thedocument. When the document is completed and becomes a negotiable

instrument, then the maker of the document is liable to any holder indue course for the amount which has been filled in the document. Theproviso to Section 20 lays down that no person other than a holder indue course shall recover from the person delivering the instrumentanything in excess of the amount intended by him to be paid thereunder.It will be noticed that the right given to complete the document is givento the holder and the holder contemplated in this section is not theholder as defined in the Act itself because it is clear that that definitioncannot apply to this expression in Section 20, but "holder" is used in thissection in the literal sense of that word, viz., the person who actuallyholds the document.The section further contemplates that if the holder havingcompleted the document negotiates it then the person who by reason ofsuch negotiation becomes a holder in due course has a right to proceedagainst the maker and recover the amount mentioned in the document.Therefore, the section provides for two rights in respect of two differentpersons. One is the right given to the holder of the document, the personwho is in possession of the document, the document being an inchoatedocument, and that right is the right to complete it. The other rightconferred is upon the holder in due course, and that right is that eventhough the holder in due course might come in possession of anegotiable instrument which was not wholly completed by the maker, hehas the same right against the maker as if he had himself written out thewhole of the document, if the document has been completed by a personwho has come into possession of it as contemplated by Section 20.Therefore, a person who permits an incomplete document to go out intothe world by giving and delivering it to any person, takes the risk ofhaving to discharge the liability, which may be provided under thedocument by the amount being filled in, to the person who bona fideand for consideration comes into possession of that document. That

seems to be the scheme of Section 20.[See: Tarachand Kevalram v. Sikri Brothers, AIR 1953 Bom 290]38 Thus, to constitute an inchoate stamped instrument within thepurview of Section 20 Negotiable Instruments Act it shall have thefollowing ingredients.(1) The instrument shall be stamped.(2) It should be stamped in accordance with law relating to thenegotiable instruments then in force in India. (3) The instrument should either be wholly blank or contains anincomplete instrument and(4) The instrument is signed and delivered to another makinghim holder of such instrument. Before an instrument acquires the status of a full­fledgednegotiable instrument, the two under mentioned conditions should besatisfied.(i) only the holder of the such instrument thereof in the physical sensecan make or complete the same. (ii) provided however that the amount to be specified therein does notexceed the amount which could be covered by the stamp. Therefore:­(i) a person who makes himself the payee of an inchoatedocument by writing up or completing the negotiable in a blankpaper cannot be regarded as a holder in due course of thatdocument. It follows therefore, that he cannot render liable themaker or the person who signed that blank document as a person

who is liable under the Negotiable Instruments Act within themeaning of the second part of Section 20.(ii) Until the drawee’s name is inserted before filing of the suit,the instrument is not a promissory note in the eye of law; theholder cannot recover the amount on the instrument; even thepermission granted by the court to fill the name would not curethe defect in the instrument. (iii) A printed promissory with the space for rate of interest beingblank is not an incomplete instrument, if enables the promisee tofill up the same so as to complete the instrument within themeaning of Section 20. (iv) The instrument may be wholly blank or incomplete in anyparticular in either case, the holder has the authority to make orcomplete the instrument as a negotiable one. The authorityimplied by a signature to a blank instrument, is so wide that theparty so signing is bound to be a holder in due course even thoughthe holder was authorized to fill for a certain amount, and be infact inserts a greater amount, but it is necessary that sum oughtnot to exceed the amount covered by the stamp.39 Section 6 of the N.I. Act defines a “cheque” as under:“A "cheque" is a bill of exchange drawn on a specified banker and notexpressed to be payable otherwise than on demand and it includes theelectronic image of a truncated cheque and a cheque in the electronic form.Explanation I.­For the purposes of this section, the expressions­(a) "a cheque in the electronic form" means a cheque which contains theexact mirror image of a paper cheque, and is generated, written andsigned in a secure system ensuring the minimum safety standards with the

use of digital signature (with or without biometrics signature) andasymmetric crypto system;(b) "a truncated cheque" means a cheque which is truncated during thecourse of a clearing cycle, either by the clearing house or by the bankwhether paying or receiving payment, immediately on generation of anelectronic image for transmission, substituting the further physicalmovement of the cheque in writing.Explanation II.­For the purposes of this section, the expression "clearinghouse" means the clearing house managed by the Reserve Bank of India ora clearing house recognised as such by the Reserve Bank of India.]”40 Section 5 of the N.I. Act defines a “bill of exchange” as under:“A "bill of exchange" is an instrument in writing containing anunconditional order, signed by the maker, directing a certain person topay a certain sum of money only to, or to the order of, a certain person orto the bearer of the instrument.”Therefore, a combined reading of Sections 5 and 6 would make itclear that an instrument would be a cheque if only it contains theparticulars as mentioned in the two sections referred to above. If thedrawee’s name is not written in the instrument, that instrument cannoteven be termed to be a bill of exchange. Therefore, if it is only a signedblank cheque leaf, it cannot be said to be a cheque within the meaningof Section 6 of the Act. 41 Section 13 of the N.I. Act defines a negotiable instrument asunder:“A "negotiable instrument" means a promissory note, bill of exchange orcheque payable either to order or to bearer.”Explanation to Section 13 also would make it clear that it must bean instrument containing all the particulars referred to earlier.42 If only it is a negotiable instrument within the meaning of Section

13 of N.I. Act, Section 87 would have any application. If it was only asigned blank cheque leaf, it cannot be termed as a ‘negotiableinstrument’, and if so the question of effecting material alteration of thatpaper (signed cheque leaf) does not arise.43 If it is only a signed blank cheque leaf that was handed over itcannot be said to be a paper stamped in accordance with law relating tothe negotiable instruments. As such the contention that, whether it iswholly blank or filled up partly making it an incomplete document andthat handing over of the same would give authority to the holder thereofto make or complete the instrument as the case may be for any amountspecified therein and not exceeding the amount covered by the stamp,cannot be sustained. So far as a cheque is concerned, if it is a signedblank cheque leaf it may be filled up showing any amount without anyrestriction what so ever and if that be so, how Section 20 of the N.I. Actcan be applied to a case of cheque. But if it is a paper stamped, it can befilled up showing the amount not exceeding the amount covered by thestamp. That is the rationale behind why Section 20 is specifically madeapplicable to the stamped documents/instruments. 44 It has been held by a Division Bench of the Kerala High Court inC.T. Joseph v. I.V. Philip [AIR 2001 Kerala 300] that Section 20 of theN.I. Act would not apply to a cheque. I may quote the observations inparas 14 and 15 as under:“14. Learned counsel for the plaintiff then argued that even the case of thefourth defendant is that he had entrusted cheque duly signed by the fourth(defendant) and the fourth defendant was authorised to issue the chequeon behalf of the Firm. He relied on Section 20 of the NegotiableInstruments Act and contended that on the basis of that the defendants areestopped from denying their liability under the cheque. So far as Section20 of the Negotiable Instruments Act is concerned, according to us, it doesnot apply because Section 20 applies only with regard to inchoate

negotiable instruments. So far as the cheques are concerned, they don'trequire any stamp under the Stamp Act in force. 15. The Lahore High Court in Dower v. Sohan Lal, AIR 1937 Lahore 816have held that insofar as the cheque do not require to be stamped, Section20 of the Negotiable Instruments Act is not applicable. Learned counsel forthe plaintiff then submitted that even if the principles under Section 20 ofthe Negotiable Instruments Act do not apply, the general principles of lawof estoppel will apply. Learned counsel also cited some decisions to showthat the general principles of law of estoppel will apply. But according tous, for the application of such principles, it is highly necessary that thecheque was issued and filled up as authorised..”45 It can be argued that when a person takes a bill in an incompleteform, he cannot be a bonafide holder for value since it can only be saidthat he has taken a piece of blank paper and not a bill and that he cantake it as a bill only under the authority given to his transferor. Section20 of the Act would make it clear that there can be no materialalteration of a cheque leaf only for the reasons that it was subsequentlyfilled up. But at the same time it cannot be said that when ever a signedblank cheque leaf is given, it gives authority to the holder to fill up thesame according to his whims and fancies. Filling up of a signed blankcheque leaf may not attract section 87 of the N.I. Act, for, there was noinsertion, interlineation, erasure, alteration etc, because there was nocompleted negotiable instrument within the meaning of sections 5, 6and 13 of the N.I. Act. Therefore, neither section 20 nor section 87applies to a blank signed cheque leaf. If so, the question must turn roundto the actual execution of the instrument.46 With regard to the instruments other than a cheque, an impliedauthority is given to the holder at the time of entrusting it to fill up thesame. There may be instances where an implied authority is given to theperson, at the time of entrusting a signed blank cheque containing thesignature of the drawer of the cheque, to fill the columns therein.

47 If a principal or employer deputes his agent or employee topurchase an article and if the dealer fills up that signed blank chequeleaf showing the exact amount covered by the bill showing the price ofthe article sold then it cannot be said that what was handed over by thedrawer of the cheque is only a signed blank cheque leaf. In such cases animplied authority to the trader/seller of the article to fill up the chequeleaf can certainly be inferred. Similarly, there may also be cases where atthe time of settlement of the accounts, a particular amount was foundpayable by the drawer of the cheque to the other party and if a signedblank cheque entrusted to be filled up later is filled up in tune with theaccounts, showing the actual amount payable by the drawer of thecheque to the other party, then also it can be said that there was theimplied authority to fill up the signed blank cheque leaf. There may besuch instances where the sum is ascertainable and the signed blankcheque leaf is given to fill up the same after ascertaining the same. Insuch cases there would be no difficulty to infer an implied authoritygiven by the drawer. Simply because the cheque is seen filled up orwritten in the hand writing of another person it cannot lead to aconclusion that only a signed blank cheque leaf was given. The personsigning the cheque may have difficulty due to many reasons to write thecheque and it might have been filled up by the payee or by another. Insuch cases it cannot be said that what was handed over was only asigned blank cheque leaf. In all such cases the ultimate conclusion maydepend upon the proof of the transaction and execution of theinstrument. It must also be held that when it is a case that only a signedblank leaf was handed over by the accused, then he must offersatisfactory explanation as to the circumstances under which the signedblank cheque happened to be handed over. Considering the totality of

the evidence and circumstances, it is for the court to draw the inferenceas to whether it was given with an implied authority to fill up the sameshowing the amount ascertained or ascertainable to discharge the debtor liability. Therefore, there may be such cases where implied authoritycan be inferred. But the contention that when a signed blank cheque leafis handed over, it can never be filled up and that if it is filled up it wouldamount to a material alteration within the meaning of using Section 87of the N.I. Act, does not stand to rhyme or reason. Similarly, thecontention that Section 20 of the N.I. Act is applicable to an unfilled orblank cheque leaf also cannot be accepted. It would depend upon thefacts of each case. Therefore, it is neither a case which attracts Section87 of the N.I. Act nor is it a case where the complainant can rely uponSection 20 of the N.I. Act and contend that as a signed blank cheque leafis given it gives an authority to fill up the same according to the whimand fancy of the payee. [See : P. Purushothaman Nair v. K. SreekantanNair, 2013 (4) ILR (Ker) 115]48 In S. Gopal v. D. Balachandran [2008 (1) CTC 491], the MadrasHigh Court observed that a bare reading of Section 20 of the NegotiableInstruments Act would go to show that it would apply only to a stampedinstrument viz., pronote and bill of exchange and not to the cheques.Therefore, Section 20 will have no application to the cheques issuedafter signing by the drawer. It has been further observed therein asfollows:­ " .... there is no law which prescribes that a cheque shall be filled up by thedrawer himself. If such proposition is accepted, no unlettered person, whoknows only to sign his name, can ever be a drawer of a cheque. Further, aperson who is physically incapacitated to fill up the cheque cannot alsodraw a cheque and negotiate it. Of course, as far as the other negotiableinstruments viz., pronotes and bills of exchange, there is a clear mandateunder Section 20 of the Negotiable Instruments Act to the effect that suchan instrument can be negotiated by the maker thereof by simply signing

and delivering the same to the holder in due course giving thereby ampleauthority to the latter to fill up the content of the instrument as intendedby the maker thereof. 10. Even in case of a cheque, as there is no clear provision in theNegotiable Instruments Act, in the light of the above discussion, the courtfinds that if a drawer of a cheque gives authority to the payee or holder indue course or a stranger for that matter to fill up the cheque signed byhim, such an instrument also is valid in the eye of law. There is no bar forthe drawer of a cheque to give authority to a third person to fill up thecheque signed by him for the purpose of negotiating the same." 49 A learned Single Judge of this Court in the case of HitenbhaiParekh Proprietor – Parekh Enterprises v. State of Gujarat [2009(3)GLH 742] has elaborately explained Section 20 of the N.I. Act. “9.1 Any material alteration of a negotiable instrument, however, rendersit void as against any one who is a party thereto at the time of makingsuch alteration and does not consent thereto, unless the alteration wasmade in order to carry out the common intention of the original parties.The provision to that effect contained in section 87 has to be read inharmony with section 20 which permits and authorizes the holder of anegotiable instrument to complete the instrument for any amount andrenders the drawer liable to the holder in due course to the extent of theamount intended by the drawer to be paid under such instrument. It isclear from plain reading of provisions of section 20 and 87 that theinjunction, under the pain of invalidating a negotiable instrument, againstalteration operates only after an inchoate instrument is completed or acomplete instrument falls within the definition of negotiable instrument.Therefore, the legally permissible completion of an inchoate instrumentcannot be construed as material alteration of a negotiable instrument.10. The above analysis of the statutory provisions leads to the conclusionthat, when a cheque bearing only signature of the drawer is delivered andreceived by a payee for the discharge, in whole or in part, of any debt orliability, there is an implied authority for the person receiving such chequeto complete it by filling the blanks and the amount having been filled upunder such implied authority would be the amount intended by him to bepaid thereunder. The focus in such cases would shift to the aspect of suchamount being for the discharge, in whole or in part, of any legallyenforceable debt or other liability. Therefore, even with the props of legalpresumptions, the onus of proving legally enforceable debt or otherliability for the discharge of which a cheque must have been drawn has tobe discharged by the prosecution for bringing home the charge of

dishonour of cheque. It may, however, be facetious to hold that a blankcheque, drawn by a person on an account maintained by him with abanker, for payment of any amount of money to another person, bymerely putting his signature on it, would not be a cheque in the first place,because of not being a bill of exchange as it did not contain direction to acertain person to pay a certain sum of money to or to the order of acertain person or to the bearer of the instrument. When the NegotiableInstruments Act expressly permits and authorizes by a substantiveprovision the completion of an inchoate instrument by section 20 with thesafe­guard provided in section 87, provisions of sections 5 and 6 definingbill of exchange and cheque have to be harmoniously read to mean that aninstrument which was initially not a cheque falling within the definition ofsection 6 would become a cheque when it was completed by filling theblanks and its dishonour shall have all the legal consequences of dishonourof a cheque proper.”50 In view of the aforesaid discussion, I am of the view that Section20 of the N.I. Act would not save the situation as such for the accusedapplicants. The collective reading of the various provisions of the N.I. Actshows that even under the scheme of the N.I. Act, it is possible for thedrawer of a cheque to give a blank cheque signed by him to the payeeand consent either impliedly or expressly to the said cheque being filledup at a subsequent point in time and present the same for payment bythe drawee. 51 The first three questions are answered accordingly.● EXISTING DEBT OR ANY OTHER LEGAL LIABILITY:52 Let me now proceed further to consider whether there was anyexisting debt or any other legal liability at the time when the blanksigned cheque was handed over to the complainant. I take notice of thefact that the cheque in question was not even a postdated cheque. If itwould have been a postdated cheque, it would have remained as a “billof exchange” till the date shown on the cheque, and thereafter, it would

have assumed the character of a cheque, but in the instant case, exceptthe signature, the other columns in the cheque were blank. Therefore, itcannot be said that it was a “bill of exchange” prior to 25th March 2013. 53 The key differences between a cheque and a bill of exchange areas under:(1) An instrument used to make payments, that can be simplytransferred by hand delivery is known as cheque. Anacknowledgment prepared by the creditor to show theindebtedness of the debtor who accepts it for payment is known asa bill of exchange.(2) A Cheque is defined in section 6 while Bill of Exchange isdefined in section 5 of the Negotiable Instrument Act, 1881 (3) The drawer and payee are always different in case of cheque.In general, drawer and payee are the same persons in case of billof exchange. (4) The stamp is not required in cheque. Conversely, a bill ofexchange must be stamped. (5) A cheque is payable to the bearer on demand. As opposed tobill of exchange, it cannot be made payable to the bearer ondemand. (6) Cheque can be crossed but a Bill of Exchange cannot becrossed. (7) There is no days of grace allowed in cheque, as the amount ispaid at the time of presentment of cheque. 3 days of grace areallowed in bill of Exchange. (8) A cheque does not need acceptance whereas a bill requires tobe accepted by the drawee.

54 There are clear­cut admissions on the part of the complainant inthe complaint itself, as well as the statutory notice issued under Section138 of the Act by which the presumption that the cheque was for aconsideration has itself been rebutted by the complainant by making atruthful disclosure in the complaint, but unfortunately, for thecomplainant, this statement of truthfulness would be akin to a self goal.I repeat. The averments in paras – 4 and 9 of the complaint evidencedthat the cheque was not for a valuable consideration when it was drawn.It was towards security and would have acquired consideration only onaccount of future contingencies. 55 The events narrated above occurred sometime in the mid 90’s.Sometime in the year 2000, disputes cropped up, and the complainanthad to file three civil suits in that regard. If the liability had already beendetermined within the meaning of Section 138 of the Act, then there wasno reason for the complainant as such to wait for seventeen odd years. Iam of the view that only with a view to short­cut the suit proceedings inwhich the Civil Court is yet to fix the liability, the complainant, on thestrength of the report of the Chartered Accountants, misused the blanksigned cheque. The account, on which the cheque was drawn, alreadystood closed on 17th July 2008 after the new management took over thecompany. By the time the new management took over, the drawer of thecheque had ceased himself to be the Director in the year 2005. Theaccount on which the cheque was drawn was not closed upon theinstructions issued by the drawer, but the same was upon theinstructions of the new management. 56 In such circumstances referred to above, I find it extremelydifficult to fasten any liability under Section 138 of the N.I. Act.

57 Mr. Ponda vehemently submitted that even if a cheque is issued byway of security, and if such a cheque is dishonoured, the Section 138would be attracted. This submission is sought to be fortified by thedecision of the Supreme Court in the case of I.C.D.S. Limited (supra). Inthat case, the husband of the accused/respondent No. 1 had obtained acar under a hire purchase agreement from the complainant. The accusedwas a guarantor for payment of the amount by her husband and towardsthe part payment of the said transaction, she had issued a cheque infavour of the complainant. The cheque was dishonoured and thepayment was not made in spite of the notice. The High Court quashedthe complaint on the ground that the cheque from the guarantor couldnot be said to have been issued for the purpose of discharge of any debtor liability. However, the Supreme Court set aside the order of the HighCourt. The Supreme Court observed thus in paragraphs 10 and 11."10. The language, however, has been rather specific as regards the intentof the legislature. The commencement of the section stands with the words"Where any cheque". The above noted three words are of extremesignificance, in particular, by reason of the user of the word "any" the firstthree words suggest that in fact for whatever reason if a cheque is drawnon an account maintained by him with a banker in favour of anotherperson for the discharge of any debt or other liability, the highlightedwords if read with the first three words at the commencement of Section138, leave no manner of doubt that for whatever reason it may be, theliability under this provision cannot be avoided in the event the samestands returned by the banker unpaid. The legislature has been carefulenough to record not only discharge in whole or in part of any debt butthe same includes other liability as well. This aspect of the matter has notbeen appreciated by the High Court, neither been dealt with or evenreferred to in the impugned judgment.11. The issue as regards the co­extensive liability of the guarantor and theprincipal debtor, in our view, is totally out of the purview of Section 138of the Act, neither the same calls for any discussion therein. The languageof the statute depicts the intent of the lawmakers to the effect thatwherever there is a default on the part of one in favour of another and inthe event a cheque is issued in discharge of any debt or other liability therecannot be any restriction or embargo in the matter of application of the

provisions of Section 138 of the Act. "Any cheque" and "other liability" arethe two key expressions which stand as clarifying the legislative intent soas to bring the factual context within the ambit of the provisions of thestatute. Any contra­interpretation would defeat the intent of thelegislature. The High Court, it seems, got carried away by the issue ofguarantee and guarantor's liability and thus has overlooked the trueintent and purport of Section 138 of the Act. The judgments recorded inthe order of the High Court do not have any relevance in the contextualfacts and the same thus do not lend any assistance to the contentionsraised by the respondents."58 The Supreme Court in I.C.D.S. Limited (supra) considered theprovisions of the law and held that when the cheque is issued by theguarantor in discharge of such other liability, the provisions of section138 are applicable. In fact, Section 138 itself specifically provides thatthe cheque should have been issued by a person for the discharge of anydebt or other liability. The guarantor may not be himself a debtor but heguarantees the repayment of the loan taken by the principal debtor. Bygiving such a guarantee, the guarantor incurs a liability towards thecreditor and for the discharge of that liability, if he issues a cheque, hewill be covered by the provisions of Section 138. As the cheque wasissued for the discharge of "other liability" case would be covered bySection 138.59 In Indus Airways Private Limited (supra), the Supreme Courtexplained in details the expression “for discharge of any debt or otherliability” occurring in Section 138 of the N.I. Act: “9. The explanation appended to Section 138 explains the meaning of theexpression ‘debt or other liability’ for the purpose of Section 138. Thisexpression means a legally enforceable debt or other liability. Section 138treats dishonoured cheque as an offence, if the cheque has been issued indischarge of any debt or other liability. The explanation leaves no mannerof doubt that to attract an offence under Section 138, there should belegally enforceable debt or other liability subsisting on the date of drawalof the cheque. In other words, drawal of the cheque in discharge of existingor past adjudicated liability is sine qua non for bringing an offence underSection 138. If a cheque is issued as an advance payment for purchase of

the goods and for any reason purchase order is not carried to its logicalconclusion either because of its cancellation or otherwise, and material orgoods for which purchase order was placed is not supplied, in ourconsidered view, the cheque cannot be held to have been drawn for anexiting debt or liability. The payment by cheque in the nature of advancepayment indicates that at the time of drawal of cheque, there was noexisting liability. 10. In Swastik Coaters[2] , the single Judge of the Andhra Pradesh HighCourt while considering the explanation to Section 138 held: “……..Explanation to Section 138 of the Negotiable Instruments Actclearly makes it clear that the cheque shall be relateable to anenforceable liability or debt and as on the date of the issuing of thecheque there was no existing liability in the sense that the title in theproperty had not passed on to the accused since the goods were notdelivered. ……..” 11. The Gujarat High Court in Shanku Concretes[3] dealing with Section138 of the N.I. Act held that to attract Section 138 of the N.I. Act, theremust be subsisting liability or debt on the date when the cheque wasdelivered. The very fact that the payment was agreed to some future dateand there was no debt or liability on the date of delivery of the chequeswould take the case out of the purview of Section 138 of the N.I. Act.While holding so, Gujarat High Court followed a decision of the MadrasHigh Court in Balaji Seafoods[4]. 12. In Balaji Seafoods Exports (India) Ltd v. Mac Industries Ltd [1999 (1)CTC 6 (Mad)], the Madras High Court held: “Section 138 of the Negotiable Instruments Act makes it clear thatwhere the cheque drawn by a person on an account maintained byhim with a banker for payment of any amount of money to anotherperson from out of that account for the discharge, in whole or inpart, of any debt or other liability, is returned by the bank unpaid,either because of the amount of money standing to the credit of thataccount is insufficient to honour the cheque or that it exceeds theamount arranged to be paid from that account by an agreementmade with that bank, such person shall be deemed to havecommitted an offence under Section 138 of the Act. The explanationreads that for the purposes of this section, ‘debt or other liability’means a legally enforceable debt or liability.” 13. The Kerala High Court in Ullas Supply House v. Ullas [2006 CriLJ4330(Ker)] had an occasion to consider Section 138 of the N.I. Act. In

that case, the post­dated cheque was issued by the accused along with theorder for supply of goods. The supply of goods was not made by thecomplainant. The accused first instructed the bank to stop paymentagainst the cheque and then requested the complainant not to present thecheque as he had not supplied the goods. The cheque was dishonoured. Thesingle Judge of the Kerala High Court held,“………Ext.P1 cheque cannot be stated to be one issued indischarge of the liability to the tune of the amount covered by it,which was really issued, as is revealed by Ext. D1, as the priceamount for 28 numbers of mixies, which the complainant had notsupplied. …..” 14. The reasoning of the Delhi High Court in the impugned order is asfollows: “8. If at the time of entering into a contract it is one of the conditionsof the contract that the purchaser has to pay the amount in advancethen advance payment is a liability of the purchaser. The seller of theitems would not have entered into contract unless the advancepayment was made to him. A condition of advance payment isnormally put by the seller for the reason that the purchaser may notlater on retract and refuse to take the goods either manufactured forhim or procured for him. Payment of cost of the goods in advancebeing one of the conditions of the contract becomes liability of thepurchaser. The purchaser who had issued the cheque could have beenasked to make payment either by draft or in cash. Since givingcheque is a mode of payment like any other mode of payment, it isnormally accepted as a payment. The issuance of a cheque at thetime of signing such contract has to be considered against a liabilityas the amount written in the cheque is payable by the person on thedate mentioned in the cheque. Where the seller or manufacturer, onthe basis of cheques issued, manufactures the goods or procures thegoods from outside, and has acted upon the contract, the liability ofthe purchaser gets fastened, the moment the seller or manufactureracts upon the contract and procures the goods. If for any reason, theseller fails to manufacture the goods or procure the goods it is onlyunder those circumstances that no liability is created. However,where the goods or raw material has been procured for the purchaserby seller or goods have been manufactured by the seller, it cannot besaid that the cheques were not issued against the liability. I considerthat if the liability is not construed in this manner, the sole purposeof making dishonour of the cheque as an offence stands defeated. Thepurpose of making or enacting Section 138 of the N.I. Act was toenhance the acceptability of cheque in settlement of commercialtransactions, to infuse trust into commercial transactions and tomake a cheque as a reliable negotiable instrument and to see thatthe cheques of business transactions are not dishonoured. The

purpose of Negotiable Instrument Act is to make an orderlystatement of rules of law relating to negotiable instruments and toensure that mercantile instruments should be equated with goodspassing from one hand to other. The sole purpose of the Act wouldstand defeated if after placing orders and giving advance payments,the stop payments are issued and orders are cancelled on the groundof pricing of the goods as was done in this case.” 15. The above reasoning of the Delhi High Court is clearly flawedinasmuch as it failed to keep in mind the fine distinction between civilliability and criminal liability under Section 138 of the N.I. Act. If at thetime of entering into a contract, it is one of the conditions of the contractthat the purchaser has to pay the amount in advance and there is breachof such condition then purchaser may have to make good the loss thatmight have occasioned to the seller but that does not create a criminalliability under Section 138 For a criminal liability to be made out underSection 138, there should be legally enforceable debt or other liabilitysubsisting on the date of drawal of the cheque. We are unable to accept theview of the Delhi High Court that the issuance of cheque towards advancepayment at the time of signing such contract has to be considered assubsisting liability and dishonour of such cheque amounts to an offenceunder Section 138 of the N.I. Act. The Delhi High Court has traveledbeyond the scope of Section 138 of the N.I. Act by holding that the purposeof enacting Section 138 of the N.I. Act would stand defeated if afterplacing orders and giving advance payments, the instructions for stoppayments are issued and orders are cancelled. In what we have discussedabove, if a cheque is issued as an advance payment for purchase of thegoods and for any reason purchase order is not carried to its logicalconclusion either because of its cancellation or otherwise and material orgoods for which purchase order was placed is not supplied by the supplier,in our considered view, the cheque cannot be said to have been drawn foran existing debt or liability. 16. In our opinion, the view taken by Andhra Pradesh High Court inSwastik Coaters (P) Ltd v. Deepak Bros [1997 CriLJ 1942(AP), MadrasHigh Court in Balaji Seafoods Exports (India) Ltd v. Mac Industries Ltd[(1999) 1 CTC 6 (Mad)], Gujarat High Court in Shanku Concretes (P)Ltd v. State of Gujarat [2000 Cr LJ 1988 (Guj)] and Kerala High Court inUllas Supply House v. Ullas {2006 Cri LJ 4330(Ker)] is the correct view and accords with the scheme of Section 138 of the N.I. Act.” 60 Thus, a cheque may be issued under two circumstances. First, itmay be issued for a debt in presenti, but payable in future. Secondly, it

may be issued for a debt which may become payable in future upon theoccurrence of a contingent event. The difference in the two kinds ofcheques would be that the cheque issued under the first circumstancewould be for a debt due, only payment being postponed. The lattercheque would be by way of a security. 61 The word ‘due’ means ‘outstanding at the relevant date’. The debthas to be in existence as a crystallized demand akin to a liquidateddamages and not a demand which may or may not come into existence;coming into existence being contingent upon the happening of an event. 62 A learned Single Judge of the Karnataka High Court in the case ofM/s. Shreyas Agro Services Pvt Ltd v. Chandrakumar [2006 CriminalLaw Journal 3140] considered almost an identical issue which I amcalled upon to decide. A learned Single Judge of the High Court evenconsidered the Supreme Court decision in I.C.D.S. Limited (supra).Considering the same, the learned Single Judge held in paras 3, 4 and 5as under:“3. The very scheme of procedure adopted shows that the cheques are notissued in respect of any current existing ascertained liability. The words"for discharge of any debt or other liability" in Sec. 138 of N.I. Act shouldbe interpreted to mean current existing or past ascertained liabilities. Thecheque issued in respect of future liabilities not in existence as on the dateof cheque would not attract prosecution u/S. 138 of N. I. Act. 4. The decision of the Supreme Court in I.C.D.S. Ltd. v. Beena Shabeer, ILR2003 Kar 4373 : (AIR 2002 SC 3014) has no application to the facts ofthe present case. In the said case the cheque was issued by a guarantor.The Supreme Court while interpreting the words "discharge of any debt orliability" held that the liability of the guarantor would also come withinthe ambit of words "the other liability". In the instant case the issue isaltogether different. The accused had issued a blank cheque not in respectof any current or ascertained liability but it was issued in respect ofuncertain future liability. In such situation the provisions of Section 138 ofthe Act would not attract and if a cheque so issued is dishonoured, no

offence u/S. 138 of the Negotiable Instruments Act can be inferred.5. The appellant has also produced the letter written by the accusedmarked at Ex P. 40 to contend that the accused had admitted the liability.The contents of the letter discloses that the accused admits the principalamount but however disputes the interest claimed and states that theamount reflected in the cheques is not the correct legal liability. Section 20of N.I. Act declares that inchoate instruments are also valid and legallyenforceable. In the case of a signed blank cheque, the drawer givesauthority to the drawee to fill up the agreed liability. If the drawee were todishonestly fill up any excess liability and the extent of liability if itbecomes bona fide matter of civil dispute in such case, the drawer has noobligation to facilitate the encashment of cheque. In the instant case thereply Ex. P. 40 discloses that long before presentation of cheque, the extentof liability was disputed but ignoring the objection, the company filled upthe cheque for an amount not admitted by the drawer. If the accused wereto prove that there is a bona fide dispute with regard to extent of liability,the dishonour of cheque under such circumstance does not attractprosecution u/S. 138 of N. I. Act. The dismissal of complaint is sound andproper. The appeal is dismissed.”63 I am not impressed by the submission of Mr. Ponda canvassed onbehalf of the complainant that in the year 1994­95 when the blanksigned cheque was handed over to his client as a security, there may notbe any existing debt or liability, but in the year 2013 when the chequewas filled up, the liability had got determined, and therefore, on the datewhen the cheque was filled up and presented, there was a existing debt.In fact, as observed earlier, it could be said that the signed blank chequeas such was misused by the complainant after almost a period ofseventeen years. Such misuse can be inferred from the indirect threatsgiven in the statutory notice itself that if the amount is not paid, then thecomplainant would fill up the signed blank cheque and present the samefor its encashment. In the year 2013, neither the accused i.e. the drawerof the cheque was the Managing Director of the company or in any wayconcerned with the company nor the account on which the blank signedcheque was drawn in existence. In such peculiar circumstances, it isdifficult to fix the strict liability under Section 138 of the N.I. Act on the

drawer of the cheque. 64 As on date, there may be a report of the Chartered Accountantsfixing some liability on the accused company to be discharged towardsthe complainant, but the report of the Chartered Accountants cannot betermed as final. The civil suits are still pending, and are yet to beadjudicated. 65 I also take notice of the two decisions of the Supreme Court,which are helpful to the drawer of the cheque. 66 In D.C.M. Financial Services (supra), the cheque in question wasa postdated one. It was drawn in 1995 and was presented in 1998. Thedrawer of the cheque, in the meantime, had resigned from thedirectorship of the company. The Supreme Court, while explaining theprinciple of constructive liability, held as under:“21. The cheque in question was admittedly a post dated one. It wassigned on 3rd April, 1995. It was presented only sometimes in June, 1998.In the meantime he had resigned from the directorship of the Company.The complaint petition was filed on or about 20th August, 1998.Intimation about his resignation was given to the complainant in writingby the 1st respondent on several occasions. Appellant was, therefore,aware thereof. Despite having the knowledge, the 1st respondent wasimpleaded one of the accused in the complaint as a Director Incharge ofthe affairs of the Company on the date of commission of the offence, whichhe was not. If he was proceeded against as a signatory to the cheques, itshould have been disclosed before the learned Judge as also the High Courtso as to enable him to apply his mind in that behalf. It was not done.Although, therefore, it may be that as an authorized signatory he will bedeemed to be person incharge, in the facts and circumstances of the case,we are of the opinion that the said contention should not be permitted tobe raised for the first time before us. A person who had resigned with theknowledge of the complainant in 1996 could not be a person incharge ofthe Company in 1998 when the cheque was dishonoured. He had no say inthe matter of seeing that the cheque is honoured. He could not ask theCompany to pay the amount. He as a Director or otherwise could not have

been made responsible for payment of the cheque on behalf of theCompany or otherwise. (See also Shiv Kumar Poddar v. State (NCT ofDelhi) : (2007) 3 SCC 693 : Everest Advertising Pvt. Ltd. v. State (NCT ofDelhi) : (2007) 5 SCC 54 and Raghu Lakshminarayanan v. Fine Tubes :(2007) 5 SCC 103.22. Mr. Patwalia, however, submitted that a situation may arise wherechange in the management is effected only to avoid such constructiveliability. Firstly we are not concerned with such a hypothetical case.Secondly, as noticed by this Court in Rangachari's case (supra) that aperson normally having business or commercial dealings with a company,would satisfy himself about its creditworthiness and reliability by lookingat its promoters and Board of Directors and the nature and extent of itsbusiness and its memorandum or articles of association.23. When post dated cheques are issued and the same are accepted,although it may be presumed that the money will be made available in thebank when the same is presented for encashment, but for that purpose, theharsh provision of constructive liability may not be available except whenan appropriate case in that behalf is made out. 24. Section 140 of the Act cannot be said to have any applicationwhatsoever. Reason to believe on the part of a drawer that the chequewould not be dishonoured cannot be a defence. But, then one must issuethe cheque with full knowledge as to when the same would be presented. Itappears to be a case where the appellant has taken undue advantage ofthe post dated cheques given on behalf of the company. The statute doesnot envisage misuse of a privilege conferred upon a party to the contract.Submission of Mr. Patwalia made in view of the decision of this Court inAdalat Prasad v. Rooplal Jindal and Others [(2004) 7 SCC 338] ismisplaced. Had such a contention been raised even in terms of AdalatPrasad (supra), the respondents could have filed an application forquashing in terms of Section 482 of the Code of Criminal Procedure atthat stage. Again such a contention had not been raised before the HighCourt. No such ground appears to have been taken even in the SpecialLeave Petition.”67 I can appreciate a situation that a Director of a company whodrew the cheque on behalf of that company thinks it fit to tenderresignation after having received the notice of dishonour and demandfor payment of the cheque drawn by him. In such circumstances, hecannot avoid the criminal liability under Section 138 of the N.I. Act as itmay result in incongruous situations. He could not escape from his

liability under Section 138 of the N.I. Act. The Director appointed in hisplace subsequently can plead that he was not in­charge of the affairs ofthat company when the cheque was drawn and so he cannot be madeliable. In the circumstances like this, though the offence under Section138 of the Act becomes complete only if the payment is not made withinfifteen days of the receipt of the statutory notice, yet since the Directorwho tendered the resignation could pay the amount covered by thedishonoured cheque and then resigned. 68 The situation in the case on hand is altogether different. Muchbefore the statutory notice was issued i.e. almost eight years before theissue of statutory notice, the drawer of the cheque had ceased himself tobe the Managing Director of the company. There could be manycircumstances under which a Director of a company, who drew thecheque, may have to quit the office. Sometimes the company itself wouldrelieve the Director. Like the case in hand, the entire management wouldchange and a new management may take over the affairs of thecompany. After 2005, the accused, who had drawn cheque, hadabsolutely no say in the matter of saying that the cheque is honoured.He could not have asked the new management to pay the amount. 69 In taking the aforesaid view of the matter, I am supported by adecision of this Court rendered by a learned Single Judge in the case ofAlka N. Shah v. State of Gujarat and another [2001 (2) GLR 1023. Theshort facts of the said case are that the complainant had placed fixeddeposit with the company by the name of M/s. Piramal Finance ServicesLimited, wherein the accused was the Managing Director. The companyhad issued four cheques by way of repayment of the fixed deposit. Thosefour cheques were issued in the name of the complainant and weredrawn on the account of the company under the signature of the

accused. The accused had not drawn such cheques in her personalcapacity, but in her capacity as the Managing Director of the saidcompany. The cheques were postdated whereby the due date was 13thJuly 1999. The accused resigned from the company, both as Director aswell as Managing Director. In such circumstances, this Court held inparas – 9 and 10 as under after considering the decision of the SupremeCourt: “9. The short contention raised on behalf of the present applicant[accused No.1] is that even according to the complainant, the offenceis committed by the company and the accused No.1 is only liable onaccount of her position as Managing Director of the company. On aplain reading of section 141 of the Negotiable Instruments Act, itbecomes obvious that every person "at the time the offence was committed,was in charge of and was responsible to the company" shall be deemedto be guilty of the offence....... On the facts of the case, it is an admittedposition that the offence was committed [u/s 138] when the chequeswere dishonoured, and when a notice of dishonour was issued u/s 138.This occurred in November and December of 1999, whereas the applicanthad resigned both as Director and Managing Director of the company asearly as on 27th January 1999. It could not therefore possibly be urgedthat the applicant was in any manner in charge of or responsible to thecompany, at the time the offence was committed.10. Another aspect of the matter is as to precisely when the offencecame to be committed. It is obvious that the offence could only becommitted on the presentation of the cheques on due dates, on thedishonour of the cheques, and the consequential notice being issued u/s138 of the said Act. It is not possible to contend that the offence could besaid to have been committed on the dates when the cheques wereissued irrespective of the due dates mentioned on the cheques. In thiscontext, it would be relevant to refer to the observations made by theSupreme Court in the case of Sil Imports, USA v/s Exim Aides SilkExporters, Bangalore, reported in 1999[4] SCC 567. The SupremeCourt in this decision has mainly dealt with the period of limitation forfiling a complaint u/s 142[A], in the context of the facts where notice u/s138 proviso [b] was given more than once. In this context, the SupremeCourt held that the limitation period started running from the date ofreceipt of the first notice by the drawer, by discussing and deciding thatthe cause of action arose for the purpose of filing a complaint u/s138, when the first notice is issued to the drawer and not complied withby the latter. The necessary implication which flows from this decision is,that it is the dishonour of the cheque, the issuance of the notice u/s 138,

and the non­compliance thereof which furnishes the complainant withthe cause of action. The same principle would apply in respect of theaccrual of the cause of action against a company, which would beapplicable to a company and its officers by virtue of section 141 of the saidAct.”70 In the case in hand also, the accused had not drawn the cheque inquestion in his personal capacity, but in his capacity as a ManagingDirector of the company. It is not possible to contend that any cause ofaction had accrued against the applicant accused i.e. the drawer of thecheque, since the applicant held no position whatsoever of the companywhen the cause of action in fact accrued against the company.71 The decision of the Supreme Court in D.C.M. Financial ServicesLimited (supra) has been considered by a Division Bench of the BombayHigh Court in the case of Suhas Bhand v. State of Maharastra reportedin 2010 (1) BankCas 207. The Division Bench, while answering thereference made by a learned Single Judge, observed in para – 32 asunder:“In the case of DCM Financial Service Ltd. vs. J.N. Sareen & anr., 2008ALL MR (Cri) 2272, the Supreme Court has considered the effect ofresignation of a Director in proceedings under Section 138 of the Act. Inthat case, the Director had already resigned prior to the complaint beingfiled and the complainant was kept informed of his resignation. Thecomplainant had not even raised the plea that that Director was in­chargeand management of the Company at the relevant time in the complaint.That was also a case of PDCs. The resignation of the Director was acceptedby the Company. The agreement of purchase/lease was entered intobetween the Company and the complainant in April 1995. The PDCs wereissued in April 1995 itself. The Director resigned in May 1996. Thecomplainant was informed of his resignation. One of the cheques was postdatedto January 1998 which came to be presented in June 1998 and wasdishonoured. The resignation of the Director was not challenged as notgenuine. Hence, there was no rebuttal of the presumption of the certifiedcopy of Form No.32. It was observed that the Directors of the Companywould retire by rotation and may or may not be reappointed to the Board

(which is under the provisions of Section 255 to 258 of the CompaniesAct). The Directors may also resign from the Company. There would be achange in the management of the Company. That change is not a privateaffair of the Company. Hence the Directors, who have resigned yearsbefore the cheque came to be dishonoured, could not be prosecuted. Such aDirector cannot be taken to be in­charge of and responsible to theCompany for the conduct of the business of the Company merely becauseat one point of time he played the role of a Director. It was furtherobserved that person who had resigned to the knowledge of thecomplainant could not be taken to be a person in­charge of the Companywhen the cheque was dishonoured. It may be mentioned that that was alsoa case where there was no dispute as to the factum of resignation of thatDirector.”72 In taking the aforesaid view, I am also supported by a decision ofthe Delhi High Court in the case of Kamal Goyal v. United PhosphorusLtd reported in 2013(7) RCR(Cri) 3224. The Delhi High Court alsoconsidered D.C.M. Financial Services Limited (supra) and observed inparas 11, 12 and 13 as under:“11. In DCM Financial Services Limited Vs. J.N.Sareen & Another, 2008(3) RCR (Crl.) 152, post­dated cheques were issued by the Companyknown as M/s. International Agro Allied Products Limited. The firstrespondent before the Hon'ble Supreme Court resigned from theDirectorship of the Company on 25th of May, 1996. One of the post­datedcheques, which was issued in April, 1995, i.e., before he resigned from theDirectorship of the Company, was dated 28.1.1998. The cheque whenpresented in the Bank for encashment was dishonoured. The payment tothe complainant was not made despite issue of Notice of Demand by it.The complaint against the first respondent before the Hon'ble SupremeCourt was based on the allegation that he was the person in charge andresponsible to the Company at the time when the offence was committed.It was also alleged that the offence had been committed by the Companywith the consent and connivance of accused Nos.2 to 10, which includedrespondent No.1 before the Hon'ble Supreme Court. He filed an applicationseeking discharge, relying upon Form No.32 issued by Registrar ofCompanies in support of his contention that he had resigned as a Directorof the Company much prior to dishonour of the cheque in question. Thelearned Additional Sessions Judge took note of Form No.32 and also notedthat the complainant had not filed any affidavit to the effect that it hadverified from the Registrar of Companies and Form No.32 filed by theaccused was not genuine. A Criminal Revision Petition filed against the

order of the learned Additional Sessions Judge was dismissed by the HighCourt. Relying upon its earlier decisions in the case of " K.Srikanth SinghVs. M/s.North East Securities Limited & Another", 2007(3) RCR(Criminal) 934 : 207 (4) RAJ 226 : JT 2007 (9) SC 449, the Hon'bleSupreme Court observed as under: "Section 141 of the Act provides for a constructive liability. A legalfiction has been created thereby. The statute being a penal one,should receive strict construction. It requires strict compliance ofthe provision. Specific averments in the complaint petition so as tosatisfy the requirements of Section 141 of the Act are imperative.Mere fact that at one point of time some role has been played bythe accused may not by itself be sufficient to attract theconstructive liability under Section 141 of the Act." 12. In the case before the Hon'ble Supreme Court, the respondent No.1 hadresigned from the Directorship of the Company under intimation to thecomplainant and, in these circumstances, the Hon'ble Supreme Court wasof the view that a person who had resigned with the knowledge of thecomplainant in the year 1996, could not be a person in charge of theCompany in the year 1999 when the cheque was dishonoured as he hadno say in the matter that the cheque is honoured and he could not haveasked the Company to pay the amount. In my view even if resignation wasnot given by the petitioner under intimation to the complainant, thatwould not make any difference, once the Court relying upon certified copyof Form 32 accepts his plea that he was not a director of the Company, onthe date the offence under Section 138 of Negotiable Instruments Act wascommitted. He having resigned from the directorship much prior to evenpresentation of the cheque for encashment, he cannot be vicariously liablefor the offence committed by the Company, unless it is alleged and shownthat even after resigning from directorship, he continued to control theaffairs of the company and therefore continued to be person in charge ofand responsible to the company for the conduct of its business. 13. It was also contended by the learned counsel for thecomplainant/respondent that the petitioner being the signatory of chequein question, he was its drawer within the meaning of Section 138 ofNegotiable Instruments Act. In my view, the contention is totallymisconceived. The cheque was issued by the Company and not by thepetitioner. He only signed the cheque on behalf of the Company. He doesnot become a drawer of the cheque merely by signing it on behalf of thecompany when the cheque is issued by the company in discharge of its debtor liability and is not signed by him in his personal capacity. If thecontention of the learned counsel for the complainant/respondent isaccepted, even an employee of the Company, who on account of his beingan authorized signatory signs a cheque issued by the Company towards

discharge of the debt or other liability of the Company, would be liable toprosecution and conviction under Section 138 of Negotiable InstrumentsAct even after he resigns from the company and is no more in itsemployment. This certainly could not have been the intention of thelegislature. Even the vicarious liability created under Section 138 ofNegotiable Instruments Act would not be attracted in respect of a Directoror an employee of the Company who resigns and severs his connectionswith the company, unless the complainant is able to bring his case within the purview of sub­Section 2 of Section 141 of Negotiable Instruments Act,by proving that the offence had been committed with his consent orconnivance or was otherwise attributable to any neglect on his part.”73 Mr. Ponda placed strong reliance on the decision of the SupremeCourt in the case of Laxmi Dyechem v. State of Gujarat and others[2012 (13) SCC 375] to meet with the contention as regards the drawerof the cheque ceasing to be the Managing Director much before theblank signed cheque was filled up and presented in the bank. In LaxmiDyechem (supra), the case of the appellant was that a running accountwas opened in the books of accounts of the appellant in the name of therespondent – company in which the value of the goods supplied wasdebited from time to time according to the standard accounting practice.A sum of Rs.4,91,91,035/­ (Rupees Four Crore Ninety One Lac NinetyOne Thousand Thirty Five only) was according to the appellantoutstanding against the respondent – company in the former’s books ofaccounts towards the supply made to the latter. The appellant’s furthercase was that the respondent – company had issued under the signaturesof its authorized signatories, several postdated cheques towards thepayment of the amount aforementioned. Several of those cheques(1017) when presented were dishonoured by the bank on which thesame were drawn, on the ground that the drawer’s signatures wereincomplete or that no image was found or that the signatures did notmatch. The appellant informed the respondents about the dishonour interms of the statutory notice sent under Section 138 and called upon

them to pay the amount covered by the cheques. Manifold contentions were raised before the Supreme Court andone of those was on behalf of the signatories that the dishonour hadtaken place after they had resigned from their positions and that thefailure of the company to honour the commitment implicit in thecheques could not be construed as an act of dishonesty on the part of thesignatories of the cheques. In the peculiar facts of the case, the SupremeCourt, while negativing the contention, held as under:“18...Just because the authorised signatories of the cheques have taken adifferent line of defence than the one taken by the company does not in ourview justify quashing of the proceedings against them. The decisions of thisCourt in National Small Industries Corporation Limited v. Harmeet SinghPaintal and Anr., (2010) 3 SCC 330 : (AIR 2010 SC (Supp) 569 : 2010AIR SCW 1508) and S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla andAnr., (2005) 8 SCC 89 : (AIR 2005 SC 3512 : 2005 AIR SCW 4740)render the authorised signatory liable to be prosecuted along with thecompany. In the National Small Industries Corporation Limited's case(supra) this Court observed:"19. xxxx(c) The answer to Question (c) has to be in the affirmative. Thequestion notes that the Managing Director or Joint ManagingDirector would be admittedly in­charge of the company andresponsible to the company for the conduct of its business. Whenthat is so, holders of such positions in a company become liableunder Section 141 of the Act. By virtue of the office they hold asManaging Director or Joint Managing Director, these persons arein­charge of and responsible for the conduct of business of thecompany. Therefore, they get covered under Section 141. So far asthe signatory of a cheque which is dishonoured is concerned, he isclearly responsible for the incriminating act and will be coveredunder sub­section (2) of Section 141."”74 It is well settled that an authorized signatory is very much liable tobe prosecuted along with the company for the offence under Section 138of the N.I. Act. However, it would all depend on the facts of each case.

As discussed by me, the facts of the case in hand are all togetherdifferent. I find it difficult to accept the argument of Mr. Ponda outrightrelying upon the decision of the Supreme Court in the case of LaxmiDyechem (supra). So far as this issue is concerned, I have placedreliance on the decision of the Supreme Court in the case of D.C.M.Financial Services Limited (supra) and the Division Bench decisions ofthe Bombay High Court as well as the Delhi High Court. It appears thatin Laxmi Dyechem (supra), there is no reference of the decision ofD.C.M. Financial Services Limited (supra).75 The observations of the Supreme Court in Laxmi Dyechem haveto be read in the context in which they were made. 76 It is well settled that a judgment cannot be read like a Statute.Construction of a judgment should be made in the light of the factualmatrix involved therein. What is more important is to see the issuesinvolved in a given case, and the context wherein the observations weremade by the Court while deciding the case. Observation made in ajudgment, it is trite, should not be read in isolation and out of context.[See: Goan Real Estate and Construction Ltd. v. Union of India,(2010) 5 SCC 388]: (2010 AIR SCW 2671)]. It is the ratio of thejudgment, and not every observation made in the context of the facts ofa particular case under consideration of the court, which constitutes abinding precedent. The Supreme Court in P.S. Sathappan v. AndhraBank Ltd., AIR 2004 SC 5152 has held as follows:"138. While analyzing different decisions rendered by this Court, anattempt has been made to read the judgments as should be read under therule of precedents. A decision, it is trite, should not be read as a statute.139. A decision is an authority for the questions of law determined by it.While applying the ratio, the court may not pick out a word or a sentence

from the judgment divorced from the context in which the said questionarose for consideration. A judgment as is well­known, must be read in itsentirety and the observations made therein should receive consideration inthe light of the questions raised before it. (See Haryana FinancialCorporation and Anr. v. Jagdamba Oil Mills and Anr., [2002] 1 SCR621 : (AIR 2002 SC 834). Union of India and Ors. v. Dhanwanti Devi andOrs. , (1996) 6 SCC 44 : (1996 AIR SCW 4020) Dr. Nalini Mahajan v.Director of Income­tax (Investigation) and Ors., [2002] 257 ITR 123(Delhi) (2003 Tax LR 18 (Del) State of U.P. and Anr. v. Synthetics andChemicals Ltd. and Anr. , 1991 (4) SCC 139 , A­One Granites v. State ofU.P. and Ors., 2001 AIR SCW 848 and Bhavnagar University v. PalitanaSugar Mill (P) Ltd. and Ors., (2003) 2 SCC 111 : (AIR 2003 SC 511)140. Although, decisions are galore on this point, we may refer to a recentone in State of Gujarat and Ors. v. Akhil Gujarat Pravasi V.S.Mahamandal and Ors., AIR 2004 SC 3894 wherein this Court held:"... It is trite that any observation made during the course ofreasoning in a judgment should not be read divorced from thecontext in which they were used."77 The above now takes me to consider the case of other OfficeBearers of the company who have been arrayed as accused by virtue ofsection 141 of the N.I. Act. As such it is not necessary for me to go intothis issue in view of the discussion on other points, but there are fewNon­Executive Directors and Office Bearers, like Chief Operating Officer,Chief Financial Officer, Financial Controller, nominated Directors whohave been arrayed as accused since they all came into picture after thenew management took over the company. Whether they could be heldliable under Section 141 of the N.I. Act is the question?● SCOPE OF SECTION 141 OF THE NEGOTIABLE INSTRUMENTSACT:78 Before I proceed to consider the case of the other applicants, whohave been arrayed as accused, by virtue of their vicarious liability, Ipropose to take note of the relevant portion of the complaint, which

reads thus:“4) For and on behalf of accused No.1 Company, the accused No.2 hadgiven cheque as security. In the year 2000 some cheques had arisenbetween the complainant firm and the accused No.2 and the accused No.1Company did not pay legitimate amount of the complainant firm,therefore, the complainant has filed SPL. Civil Suit No.35 of 2000,36/2000 and 37/2000 in the Civil Court at Amreli for recovery of dues,wherein the Court granted exparte interim injunction below Ex. 5 in SPL.Civil Suit No.36 of 2000...”xxx xxx xxx“17) ...The accused No.3 to 13 and 17 and 17 to 19 are the directors ofaccused No.1 company, and they are in charge of day­to­day managementof affairs of accused No.1 company hence, they are also responsible personsfor the management of accused No.1 company...”“...Moreover, the accused No.3 to 13 and 17 to 19 did not take proper careand caution to prevent occurrence of offence of dishonour of cheque nordid they make arrangement of money. The aforesaid cheque issued byaccused No.1 company has returned/dishonoured, hence, the accused No.3to 13 and 17 to 19 in their capacity as directors of accused No.1 haveabated the commission of offence. The accused No.3 to 13 and 17 to 19are in charge of day­to­day management of affairs of accused No.1company. These accused persons had also attended various meetings onbehalf of accused No.1 company. If the minutes of meeting Board ofDirectors dated 18­1­2010 are considered, then it is clear that there ismention therein about the dues of complainant and the cheque given forpayment thereof. Therefore, it is clear that the accused No.3 to 13 and 17to 19 were aware about the issuance of cheque by accused No.1.”79 Two classes of persons are liable to be prosecuted under Section138. First, those persons who are in charge of and responsible to thecompany for the conduct of its business. They are per se responsible. Inthe second category comes those persons with whose consent orconnivance the offence can be attributed.When the offence under Section 138 of the NegotiableInstruments Act has been committed by a company “every person who,

at the time the offence was committed, was in­charge of, and wasresponsible to the company for the conduct of the business of thecompany, as well as the company, shall be deemed to be guilty of theoffence and shall be liable to be proceeded against and punishedaccordingly. “ (vide Section 141 of the Negotiable Instruments Act). In Anil Hada v. Indian Acrylic Ltd [2000 Cri. LJ 373 (SC) :(2001) 1 SCC 1, it has been pointed out that three categories of personscan be discerned as brought within the purview of the penal liability,through the legal fiction envisaged in Section 141 of the NegotiableInstruments Act. They are: (1) The company which committed theoffence. (2) Every person who was in­charge of and responsible to thecompany for the conduct of the business of the company. (3) Any otherperson who is a director or a manager or a secretary or any officer of thecompany with whose connivance or with whose neglect the company hascommitted the offence. [Followed in M/s. B.S.I. Ltd v. Gift Holdings PvtLtd, 2000 Cr. LJ 1424 : AIR 2000 SC 926]The Apex Court in the said case of Anil Hada further explainingthe law as to the liability of the company and its directors, forcommitting offence of dishonour of cheque, has held that normally anoffence can be committed by human beings who are natural persons.Such offence can be tried according to the procedure established by law.But there are offences which could be attributed to the juristic personsalso. If the drawer of a cheque happens to be a juristic person like a bodycorporate it can be prosecuted for the offence under Section 138 of theAct. Now there is no scope for doubt regarding that aspect in view of theclear language employed in Section 141 of the Act. In the expandedambit of the word “company” even firms or any other associations ofpersons are included and as a necessary adjunct thereof a partner of the

firm is treated as a director of that company. Thus when the drawer of the cheque who falls within the ambit ofSection 138 of the Act is a human being or a body corporate or even afirm, prosecution proceedings can be initiated against such drawer. Inthis context the phrase “as well as” used in sub­section (1) of Section141 of the Act has some importance. The said phrase would embroil thepersons mentioned in the first category within the tentacles of theoffence on a par with the offending company. Similarly the words “shallalso” in sub­section (2) are capable of bringing the third categorypersons additionally within the dragnet of the offence on an equal par.The effect of reading Section 141 is that when the company is thedrawer of the cheque such company is the principal offender underSection 138 of the Act and the remaining persons are made offenders byvirtue of the legal fiction created by the Legislature as per the section.Hence the actual offence should have been committed by the company,and then alone the other two categories of persons would become liablefor the offence. Section 141 (1) of the Negotiable Instruments Act would providethat if the person committing an offence under Section 138 is acompany, every person who, at the time the offence was committed, wasin charge of, and was responsible to the company for the conduct of thebusiness of the company, as well as the company, shall be deemed to beguilty of the offence. Section 141(2) provides, where any offence hasbeen committed by a company and it is proved that the offence has beencommitted with the consent or connivance of, or is attributable to, anyneglect on the part of, any director, manager, secretary or other officerof the company, such director, manager secretary or other officer shallalso be deemed to be guilty of that offence. So, the joint reading of the

sub­sections (i)a(2) of Section 141 would make it clear that both thecompany as well as other persons who are connected and responsible forthe conduct of the business of the company are liable to be proceeded. Where offence under Section 138 of Negotiable Instruments Act iscommitted by a company, the complaint must prima facie disclose the actcommitted by the Directors from which a reasonable inference of theirvicarious liability cane be drawn. [Ashok Muthanna v. Exports FinanceLtd (2001) 2 Crimes 602 (Mad)]‘Vicarious liability’ in legal parlance means the liability of themaster for the acts of the servant or agent done in the course ofemployment. Section 141 makes a natural person vicariously liable forthe contravention committed by a company provided such person hassome nexus with the crime either because of his connivance with it ordue to by criminal negligence which had resulted in its commission. Nodoubt the law makes the principal liable for the acts of his agent, butunless there is some absolute duty cast upon the principal, he cannot beheld responsible for the acts of his agent. [State of Shewprasad, AIR1956 All. 610 : 1956 Cr.L.J. 1156] 80 In K.K. Ahuja (supra), the Supreme Court while explaining thevicarious liability of persons of the company observed as under:“16. Having regard to section 141, when a cheque issued by a company(incorporated under the Companies Act, 1956) is dishonoured, in additionto the company, the following persons are deemed to be guilty of theoffence and shall be liable to be proceeded against and punished : (i) every person who at the time the offence was committed, was in chargeof and was responsible to the company for the conduct of the business ofthe company; (ii) any Director, Manager, Secretary or other officer of the company with

whose consent and connivance, the offence under Section 138 has beencommitted; and (iii) any Director, Manager, Secretary or other officer of the companywhose negligence resulted in the offence under Section 138 of the Act,being committed by the company. While liability of persons in the first category arises under sub­section (1)of Section 141, the liability of persons mentioned in categories (ii) and(iii) arises under sub­section (2). The scheme of the Act, therefore is, thata person who is responsible to the company for the conduct of the businessof the company and who is in charge of business of the company isvicariously liable by reason only of his fulfilling the requirements of subsection(1). But if the person responsible to the company for the conduct ofbusiness of the company, was not in charge of the conduct of the businessof 11 the company, then he can be made liable only if the offence wascommitted with his consent or connivance or as a result of his negligence. 17. The criminal liability for the offence by a company under Section 138,is fastened vicariously on the persons referred to in sub­section (1) ofSection 141 by virtue of a legal fiction. Penal statutes are to be construedstrictly. Penal statutes providing constructive vicarious liability should beconstrued much more strictly. When conditions are prescribed forextending such constructive criminal liability to others, courts will insistupon strict literal compliance. There is no question of inferential orimplied compliance. Therefore, a specific averment complying with therequirements of Section 141 is imperative. As pointed out in K. SrikanthSingh vs. North East Securities Ltd ­ 2007 (12) SCC 788, the mere factthat at some point of time, an officer of a company had played some rolein the financial affairs of the company, will not be sufficient to attract theconstructive liability under Section 141 of the Act. 18 Sub­section (2) of section 141 provides that a Director, Manager,Secretary or other officer, though not in charge of the conduct of thebusiness of the company will be liable if the offence had been committedwith his consent or connivance or if the offence was a result of any 12negligence on his part. The liability of persons mentioned in sub­section(2) is not on account of any legal fiction but on account of the specific partplayed ­ consent and connivance or negligence. If a person is to be madeliable under sub­section (2) of section 141, then it is necessary to averconsent and connivance, or negligence on his part. 19 This takes us to the next question under sub­section (1) of section141, as to (i) who are the persons who are responsible to the company forthe conduct of the business of the company, and (ii) who could be said tobe in charge and was responsible to the company for the conduct of the

business of the company. The words "every person who, at the time of theoffence was committed, was in charge of, and was responsible for theconduct of the business of the company" occurs not only in section 141(1)of the Act but in several enactments dealing with offences by companies, tomention a few – section 278 B of the Income Tax Act, 1961, Section 22Cof Minimum Wages Act, 1948, Section 86A of the Employees StateInsurance Act, 1948, Section 14A of Employees Provident Fund andMiscellaneous Provisions Act, 1952, Section 29 of Payment of Bonus Act,1965, Section 40 of The Air 13 (Prevention and Control of Pollution) Act,1981 and Section 47 of Water (Prevention and Control of Pollution) Act,1974. But neither section 141(1) of the Act, nor the pari materiaprovisions in other enactments give any indication as to who are thepersons responsible to the company, for the conduct of the business of thecompany. Therefore, we will have to fall back upon the provisions ofCompanies Act, 1956 which is the law relating to and regulatingcompanies. 20 Section 291 of the said Act provides that subject to the provisions ofthat Act, the Board of Directors of a company shall be entitled to exerciseall such powers, and to do all such acts and things, as the company isauthorised to exercise and do. A company though a legal entity can actonly through its Board of Directors. The settled position is that aManaging Director is prima facie in charge of and responsible for thecompany's business and affairs and can be prosecuted for offences by thecompany. But insofar as other directors are concerned, they can beprosecuted only if they were in charge of and responsible for the conduct ofthe company's business. 21 A combined reading of Section 5 and 291 of Companies Act, 1956with the definitions in clauses (24), (26), (30), (31), (45) of section 2 ofthat Act would show that the following persons are considered to be thepersons who are responsible to the company for the conduct of the businessof the company : ­­ (a) the managing director(s); (b) the whole­time director(s); (c) the manager; (d) the secretary; (e) any person in accordance with whose directions or instructions theBoard of directors of the company is accustomed to act; (f) any person charged by the Board with the responsibility of complyingwith that provision (and who has given his consent in that behalf to theBoard); and (g) where any company does not have any of the officers specified in

clauses (a) to (c), any director or directors who may be specified by the Board inthis behalf or where no director is so specified, all the directors. It follows that other employees of the company, cannot be said tobe persons who are responsible to the company, for the conduct of thebusiness of the company. 22 Section 141 uses the words "was in charge of, and was responsibleto the company for the conduct of the business of the company". It isevident that a person who can be made vicariously liable under sub­section(1) of Section 141 is a person who is responsible to the company for theconduct of the business of the company and in addition is also in charge ofthe business of the company. There may be many directors and secretarieswho are not in charge of the business of the company at all. The meaningof the words "person in charge of the business of the company" wasconsidered by this Court in Girdhari Lal Gupta v. D.N. Mehta [1971 (3)SCC 189] followed in State of Karnataka v. Pratap Chand [1981 (2) SCC335] and Katta Sujatha vs. Fertiliser & Chemicals Travancore Ltd. [2002(7) SCC 655]. This Court held that the words refer to a person who is inoverall control of the day to day business of the company. This Courtpointed out that a person may be a director and thus belongs to the groupof persons making the policy followed by the company, but yet may not bein charge of the business of the company; that a person may be a Managerwho is in charge of the business but may not be in overall charge of thebusiness; and that a person may be an officer who may be in charge ofonly some part of the business. 23 Therefore, if a person does not meet the first requirement, that isbeing a person who is responsible to the company for the conduct of thebusiness of the company, neither the question of his meeting the secondrequirement (being a person in charge of the business of the company),nor the question of such person being liable under sub­section (1) ofsection 141 does not arise. To put it differently, to be vicariously liableunder sub­ section (1) of Section 141, a person should fulfill the 'legalrequirement' of being a person in law (under the statute governingcompanies) responsible to the company for the conduct of the business ofthe company and also fulfill the 'factual requirement' of being a person incharge of the business of the company. 24 Therefore, the averment in a complaint that an accused is adirector and that he is in charge of and is responsible to the company forthe conduct of the business of the company, duly affirmed in the swornstatement, may be sufficient for the purpose of issuing summons to him.But if the accused is not one of the persons who falls under the category of'persons who are responsible to the company for the conduct of the

business of the company' (listed in para 14 above), then merely by statingthat 'he was in charge of the business of the company' or by stating that'he was in charge of the day to day management of the company' or bystating that he was in charge of, and was responsible to the company forthe conduct of the business of the company', he cannot be made vicariouslyliable under section 141(1) of the Act. 25 It should, however, be kept in view that even an officer who wasnot in charge of and was responsible to the company for the conduct of thebusiness of the company can be made liable under sub­section (2) ofSection 141. For making a person liable under Section 141(2), themechanical repetition of the requirements under Section 141(1) will be ofno assistance, but there should be necessary averments in the complaint asto how and in what manner the accused was guilty of consent andconnivance or negligence and therefore, responsible under sub­section (2)of Section 141 of the Act. 26 Another aspect that requires to be noticed is that only a Director,Manager, Secretary or other officer can be made liable under sub­section(2) of section 141. But under sub­section (1) of section 141, it istheoretically possible to make even a person who is not a director orofficer, liable, as for example, a person falling under category (e) and (f)of section 5 of Companies Act, 1956. When in SMS Pharma (I), this Courtobserved that 'conversely, a person not holding any office or designation ina company may be liable if he satisfies the requirement of being in chargeof and responsible for conduct of the business of the company', this Courtobviously had in mind, persons described in clauses (e) and (f) of section 5of Companies Act. Be that as it may. 27 The position under section 141 of the Act can be summarized thus :(i) If the accused is the Managing Director or a Joint Managing Director,it is not necessary to make an averment in the complaint that he is incharge of, and is responsible to the company, for the conduct of thebusiness of the company. It is sufficient if an averment is made that theaccused was the Managing Director or Joint Managing Director at therelevant time. This is because the prefix `Managing' to the word `Director'makes it clear that they were in charge of and are responsible to thecompany, for the conduct of the business of the company. (ii) In the case of a director or an officer of the company who signedthe cheque on behalf of the company, there is no need to make a specificaverment that he was in charge of and was responsible to the company,

for the conduct of the business of the company or make any specificallegation about consent, connivance or negligence. The very fact that thedishonoured cheque was signed by him on behalf of the company, wouldgive rise to responsibility under sub­section (2) of section 141. (iii) In the case of a Director, Secretary or Manager (as defined in Sec.2(24) of the Companies Act) or a person referred to in clauses (e) and (f)of section 5 of Companies Act, an averment in the complaint that he wasin charge of, and was responsible to the company, for the conduct of thebusiness of the company is necessary to bring the case under section141(1). No further averment would be necessary in the complaint, thoughsome particulars will be desirable. They can also be made liable undersection 141(2) by making necessary averments relating to consent andconnivance or negligence, in the complaint, to bring the matter under thatsub­section. (iv)Other Officers of a company can not be made liable under sub­section(1) of section 141. Other officers of a company can be made liable onlyunder sub­section (2) of Section 141, be averring in the complaint theirposition and duties in the company and their role in regard to the issueand dishonour of the cheque, disclosing consent, connivance or negligence. 28 If a mere reproduction of the wording of section 141(1) in thecomplaint is sufficient to make a person liable to face prosecution,virtually every officer/employee of a company without exception could beimpleaded as accused by merely making an averment that at the timewhen the offence was committed they were in charge of and wereresponsible to the company for the conduct and business of the company.This would mean that if a company had 100 branches and the chequeissued from one branch was dishonoured, the officers of all the 100branches could be made accused by simply making an allegation that theywere in charge of and were responsible to the company for the conduct ofthe business of the company. That would be absurd and not intendedunder the Act. 29 As the trauma, harassment and hardship of a criminal proceedingsin such cases, may be more serious than the ultimate punishment, it is notproper to subject all and sundry to be impleaded as accused in a complaintagainst a company, even when the requirements of section 138 read andsection 141 of the Act are not fulfilled.”81 In view of the aforesaid dictum of law explained by the Supreme

Court, the other accused who have been arrayed as accused by virtue ofSection 141 of the N.I. Act could not be held liable. I take notice of thefact that some of the accused are Office Bearers, like the Chief OperatingOfficer, Chief Financial Officer, Financial Controller. Some of theDirectors are nominated Directors and also Non­Executive. 82 I am also not impressed by the argument of Mr. Ponda that as theinherent powers of this Court under Section 482 of the Cr.P.C. arecircumscribed, and should be exercised only in cases where the Courtfinds an abuse of the process of law, all the applications deserve to beoutright rejected, leaving all the legal contentions open to be canvassedbefore the trial Court. 83 In Harshendra Kumar D. v. Rebatilata Koley etc [2011 CriminalLaw Journal 1626], the Supreme Court held as under:“21 In our judgment, the above observations cannot be read to meanthat in a criminal case where trial is yet to take place and the matter is atthe stage of issuance of summons or taking cognizance, materials reliedupon by the accused which are in the nature of public documents or thematerials which are beyond suspicion or doubt, in no circumstance, can belooked into by the High Court in exercise of its jurisdiction under Section482 or for that matter in exercise of revisional jurisdiction under Section397 of the Code. It is fairly settled now that while exercising inherentjurisdiction under Section 482 or revisional jurisdiction under Section 397of the Code in a case where complaint is sought to be quashed, it is notproper for the High Court to consider the defence of the accused or embarkupon an enquiry in respect of merits of the accusations. However, in anappropriate case, if on the face of the documents ­ which are beyondsuspicion or doubt ­ placed by accused, the accusations against him cannotstand, it would be travesty of justice if accused is relegated to trial and heis asked to prove his defence before the trial court. In such a matter, forpromotion of justice or to prevent injustice or abuse of process, the HighCourt may look into the materials which have significant bearing on thematter at prima facie stage. 22. Criminal prosecution is a serious matter; it affects the liberty of aperson. No greater damage can be done to the reputation of a person thandragging him in a criminal case.”

84 I take notice of the fact that in complaints filed for the offenceunder Section 138 of the N.I. Act, all the Directors of the company andeven the Office Bearers are routinely being proceeded against byinvoking the provisions under Section 141 of the N.I. Act by gliblyrepeating the words in the section that certain Director “was incharge ofand responsible to the company for the conduct of business of thecompany”. It is necessary to emphasis that Section 141 of the N.I. Actwhere an offence under Section 138 of the N.I. Act has been committedby a company, the complainant is required to give a serious thought andmake enquiries and ascertain the fact as to whether a particular Directorwas incharge of and responsible to the affairs and conduct of thebusiness of the company. Routinely roping in all the Directors by merelyrepeating the words used in Section 141 of the N.I. Act withoutascertaining the facts is a serious matter which has to be deprecated. 85 Some of the applicants before me are indisputably non­executiveDirectors of the company. A non­executive Director is no doubt acustodian of the governance of the company, but does not involve in theday­to­day affairs of the running of its business and only monitors theexecutive activity. [See: Pooja Ravinder Devidasani v. State ofMaharastra, AIR 2015 SC 675]86 In Pooja Ravinder Devidasani (supra), the Supreme Court madethe following observations in para – 30, which I deem fit to refer andrely upon :“30. Putting the criminal law into motion is not a matter of course. Tosettle the scores between the parties which are more in the nature of a civildispute, the parties cannot be permitted to put the criminal law into

motion and Courts cannot be a mere spectator to it. Before a Magistratetaking cognizance of an offence under Section 138/141 of the N.I. Act,making a person vicariously liable has to ensure strict compliance of thestatutory requirements. The Superior Courts should maintain purity in theadministration of justice and should not allow abuse of the process of theCourt. The High Court ought to have quashed the complaint against theappellant which is nothing but a pure abuse of process of law. 87 A Division Bench of this Court (to which I was a party) in the caseof Ionic Metalliks and others [Special Civil Application No.645 of2014 decided on 9th September 2014], while examining the challengeto the legality and validity of a master circular dated 2nd July 2012issued by the Reserve Bank of India in respect of “willful defaulters” hadan occasion to consider the categories of Directors as classified under theCompanies Act. I may quote the following from the judgment referred toabove:“The circular speaks about director and independent and nomineedirector. The classification of the directors under the Companies Act is asunder :A. Classification under the Companies ActCategories of DirectorsThe Companies Act refers to the following two specific categories ofDirectors:1. Managing Directors; and2. Whole­time Directors.A Managing Director is a Director who has substantial powers ofmanagement of the affairs of the company subject to the superintendence,control and direction of the Board in question. A Whole­time Directorincludes a Director who is in the whole­time employment of the company,devotes his whole­time of working hours to the company in question andhas a significant personal interest in the company as his source of income.Every public company and private company, which is a subsidiary

of a public company, having a share capital of more than Five Crorerupees (Rs. 5,00,00,000/­) must have a Managing or Whole­time Directoror a Manager.Further classification of DirectorsBased on the circumstances surrounding their appointment, theCompanies Act recognizes the following further types of Directors:1. First Directors: Subject to any regulations in the Articles of a company,the subscribers to the Memorandum of Association, or the company'scharter or constitution ("Memorandum"), shall be deemed to be theDirectors of the company, until such time when Directors are dulyappointed in the annual general meeting ("AGM").2. Casual vacancies: Where a Director appointed at the AGM vacates officebefore his or her term of office expires in the normal course, the resultingvacancy may, subject to the Articles, be filled by the Board. Such person soappointed shall hold office up to the time which the Director who vacatedoffice would have held office if he or she had not so vacated such office.3. Additional Directors: If the Articles specifically so provide or enable, theBoard has the discretion, where it feels it necessary and expedient, toappoint Additional Directors who will hold office until the next AGM.However, the number of Directors and Additional Directors together shallnot exceed the maximum strength fixed in the Articles for the Board.4. Alternate Director: If so authorized by the Articles or by a resolutionpassed by the company in general meeting, the Board may appoint anAlternate Director to act for a Director ("Original Director"), who is absentfor whatever reason for a minimum period of three months from the Statein which the meetings of the Board are ordinarily held. Such AlternateDirector will hold office until such period that the Original Director wouldhave held his or her office. However, any provision for automatic reappointmentof retiring Directors applies to the Original Director and notto the Alternate Director.5. 'Shadow' Director: A person, who is not appointed to the Board, but onwhose directions the Board is accustomed to act, is liable as a Director ofthe company, unless he or she is giving advice in his or her professionalcapacity. Thus, such a 'shadow' Director may be treated as an 'officer indefault' under the Companies Act.6. De facto Director: Where a person who is not actually appointed as a

Director, but acts as a Director and is held out by the company as such,such person is considered as a de facto Director. Unlike a 'shadow'Director, a de facto Director purports to act, and is seen to the outsideworld as acting, as a Director of the company. Such a de facto Director isliable as a Director under the Companies Act.7. Rotational Directors: At least two­thirds of the Directors of a publiccompany or of a private company subsidiary of a public company have toretire by rotation and the term "rotational Director" refers to suchDirectors who have to retire (and may, subject to the Articles, be eligiblefor re­appointment) at the end of his or her tenure.8. Nominee Directors: They can be appointed by certain shareholders, thirdparties through contracts, lending public financial institutions or banks, orby the Central Government in case of oppression or mismanagement. Theextent of a nominee Director's rights and the scope of supervision by theshareholders, is contained in the contract that enables such appointments,or (as appropriate) the relevant statutes applicable to such public financialinstitution or bank. However, nominee Directors must be particularlycareful not to act only in the interests of their nominators, but must act inthe best interests of the company and its shareholders as a whole.Thefixing of liabilities on nominee Directors in India does not turn on thecircumstances of their appointment or, indeed, who nominated them asDirectors. Chapter 4 and Chapter 5 that follow set out certain duties andliabilities that apply to, or can be affixed on, Directors in general. Whethernominee Directors are required by law to discharge such duties or bearsuch liabilities will depend on the application of the legal provisions inquestion, the fiduciary duties involved and whether such nominee Directoris to be regarded as being in control or in charge of the company and itsactivities. This determination ultimately turns on the specific facts andcircumstances involved in each case.B. Classification under the Listing AgreementThe Securities Contracts (Regulation) Act, 1956, read with therules and regulations made thereunder, requires every company desirousof listing its shares on a recognized Indian stock exchange, to execute alisting agreement ("Agreement") with such Indian stock exchange. ThisAgreement is in a standard format (prescribed by the Securities ExchangeBoard of India ("SEBI")), as amended by SEBI from time to time. TheAgreement provides for the following further categories of Directors:Categories under Listing Agreement

1. Executive Director;2. Non­executive Director; and3. Independent Director.Executive and non­executive DirectorsAn Executive Director can be either a Whole­time Director of thecompany (i.e., one who devotes his whole time of working hours to thecompany and has a significant personal interest in the company as hissource of income), or a Managing Director (i.e., one who is employed bythe company as such and has substantial powers of management over theaffairs of the company subject to the superintendence, direction andcontrol of the Board). In contrast, a non­executive Director is a Directorwho is neither a Whole­time Director nor a Managing Director. Clause 49of the Agreement prescribes that the Board shall have an optimumcombination of executive and non­executive Directors, with not less thanfifty percent (50%) of the Board comprising non­executive Directors.Where the Chairman of the Board is a non­executive Director, at least onethirdof the Board should comprise independent Directors and in case he isan executive Director, at least half of the Board should compriseindependent Directors. Where the non­executive Chairman is a promoterof the company or is related to any promoter or person occupyingmanagement positions at the Board level or at one level below the Board,at least one­half of the Board of the company shall consist of independentDirectors.Independent DirectorsThe Agreement defines an "Independent Director" as a nonexecutiveDirector of the company who:a. apart from receiving Director's remuneration, does not have materialpecuniary relationships or transactions with the company, its promoters,its Directors, its senior management, or its holding company, itssubsidiaries, and associates which may affect independence of the Director;b. is not related to promoters or persons occupying management positionsat the board level or at one level below the board;c. has not been an executive of the company in the immediately precedingthree (3) financial years;d. is not a partner or an executive or was not a partner or an executive

during the preceding three (3) years, of any of the following:i. the statutory audit firm or the internal audit firm that is associatedwith the company, and ii. the legal firms and consulting firms that have a materialassociation with the company; e. is not a material supplier, service provider or customer or a lessor orlessee of the company, which may affect the independence of the Director;orf. he is not a substantial shareholder of the company, i.e., owning twopercent (2%) or more of the block of voting shares; andg. he is not less than twenty­one (21) years of age.Nominee directors appointed by an institution that has invested in, or lentmoney to, the company are also treated as independent Directors.”88 The following observations of the Supreme Court, made in thecase of M/s. Pepsi Foods Ltd v. Special J.M. [1998 Cri. L.J. 1 : AIR1998 SC 128] should be kept in mind by the Magistrates, when theydecide to summon a director or partner of a company or firm to face trialunder Section 138 of the Negotiable Instruments Act. “Summoning of an accused in a criminal case is a serious matter. Criminallaw cannot be set into motion as a matter of course. It is not that thecomplainant has to bring only two witnesses to support his allegations inthe complaint to have the criminal law set into motion. The order of theMagistrate summoning the accused must reflect that he has applied hismind to the facts of the case and the law applicable thereto. He has toexamine the nature of allegations made in the complaint and the evidenceboth oral and documentary in support thereof and would that be sufficientfor the complainant to succeed in bringing charge home to the accused. Itis not that the Magistrate is a silent spectator at the time of recording ofpreliminary evidence before summoning of the accused. Magistrate has tocarefully scrutinise the evidence brought on record and may even himselfput questions to the complainant and his witnesses to elicit answers to find

out the truthfulness of the allegations or otherwise and then examine ifany offence is prima facie committed by all or any of the accused.”“This has assumed all the more significance in view of the recenttrend found that in respect of offences under Section 138 of the NegotiableInstruments Act alleged against a company, all the Directors of thecompany are being routinely roped in as accused with a statement thatthey are in­charge of and responsible to the business of the company asrequired under Section 141 of the Negotiable Instruments Act. In fact, ithas been seen that some times, even the nominee Directors nominated bythe financial agencies like IDBI have also been arrayed as accused for theoffence committed by the Company on the Board of which they have beennominated. The need to carefully scrutinize the material and if necessaryto question the complainant as to the basis for implicating an accused asobserved by the Supreme Court in the above cited judgment cannot beignored.Considering this, it appears necessary that at any rate even if onthe basis of formal allegations in the complaint such Directors have beensummoned to face the trial, they must be afforded an opportunity at leastat the earliest stage to show with reference to the material which may beplaced before the Court that they are not in­charge of and are notresponsible to the business of the company and on that basis seek theirdischarge from the array of the accused. In such cases, I think it will be agreat injustice if they are asked to go through the ordeal of the trial andplead their defence only during the trial. [Om Prakash Agrawal v. Stateof A.P., 2001 Cri. L.J. 253 (para 13) A.P.]”89 In N.K. Wahi v. Shekhar Singh and others [2007 (9) SCC 481],the Supreme Court, after considering its earlier judgment on the point inquestion, held as under:“7. This provision clearly shows that so far as the companies are concernedif any offence is committed by it then every person who is a Director oremployee of the company is not liable. Only such person would be heldliable if at the time when offence is committed he was in charge and wasresponsible to the company for the conduct of the business of the companyas well as the company. Merely being a Director of the company in theabsence of above factors will not make him liable.8. To launch a prosecution, therefore, against the alleged Directors theremust be a specific allegation in the complaint as to the part played bythem in the transaction. There should be clear and unambiguous

allegation as to how the Directors are incharge and responsible for theconduct of the business of the company. The description should be clear. Itis true that precise words from the provisions of the Act need not bereproduced and the Court can always come to a conclusion in facts of eachcase. But still in the absence of any averment or specific evidence the netresult would be that complaint would not be entertainable.”90 In Gunmala Sales Private Limited (supra), the Supreme Court,after an exhaustive review of all its earlier decisions on Section 141 ofthe N.I. Act, summarized its conclusion as under:“a) Once in a complaint filed under Section 138 read with Section 141 ofthe NI Act the basic averment is made that the Director was in charge ofand responsible for the conduct of the business of the company at therelevant time when the offence was committed, the Magistrate can issueprocess against such Director; b) If a petition is filed under Section 482 of the Code for quashing of sucha complaint by the Director, the High Court may, in the facts of aparticular case, on an overall reading of the complaint, refuse to quash thecomplaint because the complaint contains the basic averment which issufficient to make out a case against the Director; c) In the facts of a given case, on an overall reading of the complaint, theHigh Court may, despite the presence of the basic averment, quash thecomplaint because of the absence of more particulars about role of theDirector in the complaint. It may do so having come across someunimpeachable, uncontrovertible evidence which is beyond suspicion ordoubt or totally acceptable circumstances which may clearly indicate thatthe Director could not have been concerned with the issuance of chequesand asking him to stand the trial would be abuse of the process of thecourt. Despite the presence of basic averment, it may come to a conclusionthat no case is made out against the Director. Take for instance a case of aDirector suffering from a terminal illness who was bedridden at therelevant time or a Director who had resigned long before issuance ofcheques. In such cases, if the High Court is convinced that prosecuting sucha Director is merely an arm­twisting tactics, the High Court may quashthe proceedings. It bears repetition to state that to establish such caseunimpeachable, uncontrovertible evidence which is beyond suspicion ordoubt or some totally acceptable circumstances will have to be brought tothe notice of the High Court. Such cases may be few and far between butthe possibility of such a case being there cannot be ruled out. In theabsence of such evidence or circumstances, complaint cannot be quashed;

d) No restriction can be placed on the High Court's powers under Section482 of the Code. The High Court always uses and must use this powersparingly and with great circumspection to prevent inter alia the abuse ofthe process of the Court. There are no fixed formulae to be followed by theHigh Court in this regard and the exercise of this power depends upon thefacts and circumstances of each case. The High Court at that stage doesnot conduct a mini trial or roving inquiry, but, nothing prevents it fromtaking unimpeachable evidence or totally acceptable circumstances intoaccount which may lead it to conclude that no trial is necessary qua aparticular Director.”91 In view of the above, there is no cogent material on record tofasten any vicarious liability so far as the other accused are concernedwho are Non­Executive Directors including the Office Bearers concernedwith the Accounts Department of the company. 92 The plain reading of Section 138 of the N.I. Act would clearly goto show that by reason thereof, a legal fiction had been created. A legalfiction, as is well­known, although is required to be given full effect, yethas its own limitations. It cannot be taken recourse to for any purposeother than the one mentioned in the statute itself. Section 138 of the Actmoreover provides for a penal provision. A penal provision created byreason of a legal fiction must receive strict construction. Such a penalprovision, enacted in terms of the legal fiction drawn, would be attractedwhen a cheque is returned by the bank unpaid. Before a proceedingthereunder is initiated, all the legal requirements therefor must becomplied with. The Court must be satisfied that all the ingredients ofcommission of an offence under the said provision have been compliedwith. [See: Raj Kumar Khurana v. State of (NCT of Delhi) and another,(2009) 6 SCC 72]93 Before concluding, I may only say that, whenever a blank chequeor postdated cheque is issued, a trust is reposed that the cheque will be

filled in or used according to the understanding or agreement betweenthe parties. If there is a prima facie reason to believe that the said trust isnot honoured, then the continuation of prosecution under Section 138 ofthe N.I. Act would be the abuse of the process of law. It is in the interestof justice that the parties in such cases are left to the civil remedy. 94 In my view, having regard to the peculiar facts and circumstancesof the case, as narrated above, all the petitions succeed and are allowed.The order of the issuance of the process under Section 138 of the N.I.Act is hereby quashed. Rule is made absolute accordingly. 95 It is clarified that the three civil suits, which are pending as ondate, in the Court of the learned Civil Judge, Senior Division, Amreli,shall proceed further in accordance with law. The learned Civil Judge isdirected to take up all the three civil suits for hearing and see to it thatthey are disposed of with the judgment within a period of one year fromthe date of receipt of this order. It is further clarified that the three civilsuits shall be decided strictly on the basis of the evidence that may beled oral as well as documentary by both the sides, and without beinginfluenced, in any manner, by any of the observations made in thisjudgment and order. This judgment and order is only confined so far asthe liability of the accused applicants under Section 138 of the N.I. Act isconcerned. It has nothing to do so far as the other civil liabilities areconcerned.(J.B.PARDIWALA, J.)